Working Paper: NBER ID: w31282
Authors: Jess Fernández-Villaverde; Jol Marbet; Galo Nuo; Omar Rachedi
Abstract: This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households' precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality.
Keywords: Household Inequality; Zero Lower Bound; Monetary Policy; Heterogeneous Agent Models; Precautionary Savings
JEL Codes: D31; E12; E21; E31; E43; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household inequality (D31) | precautionary savings (D14) |
| precautionary savings (D14) | real interest rate (E43) |
| real interest rate (E43) | nominal rates (E43) |
| ZLB (E62) | inflation distribution (D39) |
| ZLB (E62) | nominal and real interest rates (E43) |
| ZLB (E62) | aggregate consumption (E20) |
| ZLB (E62) | wealth-poor households (D31) |
| household heterogeneity (D19) | central bank's ability to lower nominal rates (E52) |
| ZLB (E62) | divergence between SSS and DSS (C42) |