Working Paper: NBER ID: w30961
Authors: Eduardo Dvila; Andreas Schaab
Abstract: This paper characterizes optimal monetary policy in a canonical heterogeneous-agent New Keynesian (HANK) model with wage rigidity. Under discretion, a utilitarian planner faces the incentive to redistribute towards indebted, high marginal utility households, which is a new source of inflationary bias. With commitment, i) zero inflation is the optimal long-run policy, ii) time-consistent policy requires both inflation and distributional penalties, and iii) the planner trades off aggregate stabilization against distributional considerations, so Divine Coincidence fails. We compute optimal stabilization policy in response to productivity, demand, and cost-push shocks using sequence-space methods, which we extend to Ramsey problems and welfare analysis.
Keywords: No keywords provided
JEL Codes: E52; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| utilitarian planner's incentives (D61) | inflation outcomes (E31) |
| utilitarian planner's incentives (D61) | output above natural levels (E23) |
| output above natural levels (E23) | inflationary bias in equilibrium (E31) |
| commitment to zero inflation (E31) | stable long-run economic environment (P17) |
| timeless penalties (C41) | elimination of inflationary bias (short and long run) (E31) |