scholarly journals Understanding HANK: Insights From a PRANK

Econometrica ◽  
2020 ◽  
Vol 88 (3) ◽  
pp. 1113-1158 ◽  
Author(s):  
Sushant Acharya ◽  
Keshav Dogra
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Incomplete Markets ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Income Risk ◽  
Heterogeneous Agent ◽  
Liquidity Trap ◽  
Forward Guidance ◽  
Keynesian Model

Using an analytically tractable heterogeneous agent New Keynesian model, we show that whether incomplete markets resolve New Keynesian “paradoxes” depends on the cyclicality of income risk. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only with procyclical risk. Countercyclical risk amplifies these “puzzles.” Procyclical risk permits determinacy under a peg; countercyclical risk may generate indeterminacy even under the Taylor principle. By affecting the cyclicality of risk, even “passive” fiscal policy influences the effects of monetary policy.

scholarly journals Monetary Policy, Bounded Rationality, and Incomplete Markets

2019 ◽  
Vol 109 (11) ◽  
pp. 3887-3928 ◽  
Author(s):  
Emmanuel Farhi ◽  
Iván Werning
Keyword(s):  
Monetary Policy ◽  
Bounded Rationality ◽  
Incomplete Markets ◽  
Idiosyncratic Risk ◽  
Borrowing Constraints ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Benchmark Model ◽  
Forward Guidance ◽  
Keynesian Model

This paper extends the benchmark New-Keynesian model by introducing two frictions: (i) agent heterogeneity with incomplete markets, uninsurable idiosyncratic risk, and occasionally-binding borrowing constraints; and (ii) bounded rationality in the form of level-k thinking. Compared to the benchmark model, we show that the interaction of these two frictions leads to a powerful mitigation of the effects of monetary policy, which is more pronounced at long horizons, and offers a potential rationalization of the “forward guidance puzzle.” Each of these frictions, in isolation, would lead to no or much smaller departures from the benchmark model. (JEL D52, D81, E12, E52)

scholarly journals Optimal Forward Guidance

2019 ◽  
Vol 11 (4) ◽  
pp. 310-345 ◽  
Author(s):  
Florin O. Bilbiie
Keyword(s):  
Interest Rates ◽  
Dynamic Stochastic General Equilibrium ◽  
Bad News ◽  
New Keynesian ◽  
Simple Rule ◽  
New Keynesian Model ◽  
Liquidity Trap ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Dynamic Stochastic

Optimal forward guidance is the simple policy of keeping interest rates low for some optimally determined number of periods after the liquidity trap ends and moving to normal-times optimal policy thereafter. I solve for the optimal duration in closed form in a new Keynesian model and show that it is close to fully optimal Ramsey policy. The simple rule “announce a duration of half of the trap’s duration times the disruption” is a good approximation, including in a medium-scale dynamic stochastic general equilibrium (DSGE) model. By anchoring expectations of Delphic agents (who mistake commitment for bad news), the simple rule is also often welfare-preferable to Odyssean commitment. (JEL D84, E12, E43, E52, E56)

ARE MAJOR CENTRAL BANKS BLINDED BY THE ANALYTICAL ELEGANCE OF THEIR MODELS? POSSIBLE COSTS OF UNCONVENTIONAL MONETARY POLICY MEASURES

2017 ◽  
Vol 62 (01) ◽  
pp. 87-108 ◽  
Author(s):  
PIOTR CIŻKOWICZ ◽  
ANDRZEJ RZOŃCAZ
Keyword(s):  
Monetary Policy ◽  
Global Financial Crisis ◽  
Significant Risk ◽  
Central Banks ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Unconventional Monetary Policy ◽  
Keynesian Model ◽  
Policy Measures ◽  
The Global Financial Crisis

We survey the possible costs of the unconventional monetary policy measures undertaken by major central banks after the outbreak of the global financial crisis in 2008. We argue that these costs are not easily discernable in the new Keynesian (NK) model, which defines a theoretical framework for monetary policy. First, the costs may result from the effects of unconventional monetary policy measures on the intensity of restructuring and the persistence of uncertainty (which increased after the outbreak of the crisis). However, neither of these processes is considered in the new Keynesian model. Second, costs may be generated not only by distortions in the choices made by economic agents but may also be a result of the decisions made by governments, particularly in terms of the fiscal deficit level. However, the new Keynesian model does not consider the effects of unconventional monetary policy measures on the quality of fiscal policy. Without carefully considering the costs, there is a significant risk that unconventional monetary policy measures could become a conventional response to recurrent crises.

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