Fiscal and Monetary Policy with Heterogeneous Agents
Paper Session
Friday, Jan. 3, 2025 10:15 AM - 12:15 PM (PST)
- Chair: Karin Kinnerud, BI Norwegian Business School
Beyond Bad Luck... Macroeconomic Implications of Persistent Heterogeneity in Optimism
Abstract
Business cycle models often abstract from persistent household heterogeneity, despite itspotentially significant implications for macroeconomic fluctuations and policy. We show empirically
that the likelihood of being persistently financially constrained decreases with cognitive
skills and increases with overconfidence thereon. Guided by this and other micro evidence,
we add persistent heterogeneity in cognitive skills and overconfidence to an otherwise standard
HANK model. Overconfidence proves to be the key innovation, driving households to
spend instead of precautionary save and producing empirically realistic wealth distributions
and hand-to-mouth shares and MPCs across the income distribution. We highlight implications
for various fiscal policies.
The Macroeconomic Implications of Coholding
Abstract
In the United States, 30% of households are coholders who simultaneously borrow on credit cards and hold liquid assets. This generates a rich distribution of gross wealth positions that underpins the distribution of net wealth often used to calibrate macroeconomic models. We show that, beyond their role in constructing net wealth, gross positions are important for understanding how households consume, save, and repay debt in response to positive income shocks. We build a quantitative model that generates the coholding observed in the data and matches the empirically observed marginal propensities to consume, save, and repay debt. The model highlights that fiscal transfers are more effective in stimulating demand if targeted at low gross wealth instead of low net wealth households, while debt relief is less effective overall in the short-run but achieves large consumption gains in the long run.Decomposing HANK
Abstract
This paper introduces a decomposition of the responses of macroeconomic variables to aggregate shocks in heterogeneous-agent New Keynesian (HANK) models. I decompose these responses into representative-agent (RANK) and redistribution effects. To obtain RANK effects, I introduce counterfactual transfers that counteract the redistribution triggered by the aggregate shock and ensure that all agents are equally affected by the shock. In this case, aggregates of the HANK model satisfy the equilibrium conditions of a (fictitious) RANK model. I show the existence of such transfers in various heterogeneous-agent models. Redistribution effects are derived from the HANK model's response to the redistribution shock backup from the counterfactual transfers. Further analysis of these transfers analytically breaks down the redistribution shock into four channels: income exposure, interest rate exposure, liquidity, and asset price. I apply this decomposition to a monetary policy shock and quantitatively assess the contribution of each redistribution channel to the different responses observed in HANK and RANK. I also apply the decomposition to current literature to identify the key redistribution channels driving the model dynamics.JEL Classifications
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit