Monetary Policy and Heterogeneity: An Analytical Framework

Abstract

THANK is a tractable heterogeneous-agent New-Keynesian model that captures analytically key micro-heterogeneity channels of quantitative-HANK: cyclical inequality; idiosyncratic risk and selfinsurance, precautionary saving; and realistic propensities-to-consume. I use it for a full-fledged New-Keynesian macro analysis: determinacy with interest-rate rules, solving the forward-guidance puzzle, amplification-multipliers, liquidity traps, and optimal policy. Amplification requires countercyclical while solving the puzzle requires pro-cyclical inequality—a Catch-22, resolved by adding separate (pro)cyclical risk sources. Price-level-targeting ensures determinacy and is puzzle-free, regardless of inequality and risk cyclicality. Optimal policy with heterogeneity features a novel inequalitystabilization motive generating higher inflation volatility and, in a liquidity trap, shorter forwardguidance duration.