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CHALLE Edouard (Ecole Polytechnique and CREST) “Optimal Monetary Policy in HANK Economies”

December 16, 12:15 pm - 1:30 pm

Time: 12:15pm – 13:30 pm
Date: 16th of December 2019
Place: Room 3001

CHALLE Edouard (Ecole Polytechnique and CREST)  “Optimal Monetary Policy in HANK Economies”

Abstract : We study optimal monetary policy in a tractable Heterogenous-Agent New Keynesian (HANK) economy wherein households can trade bonds to smooth the e ect of uninsured, idiosyncratic earnings shocks. In this economy a benevolent central bank has an incentive to reduce cross-sectional consumption dispersion, in addition to aligning output and inflation to their effi cient levels. We show that the central bank potentially has two ways to achieve this purpose, namely, it can (i) reduce the amount of earnings risk to which households are exposed (the income-risk channel), and (ii) reduce pass-through from earnings risk to consumption risk (the self-insurance channel). We expose the conditions under which these channels create at tradeo between inequality and productive e ciency, and show that such a tradeo always exists when earnings risk is acyclical or countercylical. In the empirically relevant case of countercyclical earnings risk, the central bank is willing to let output and inflation persistently overshoot their effi cient levels in a recession in order to dampen the increase in consumption inequality
(and the other way around in an expansion). We also uncover a new form of time-inconsistency of the Ramsey plan, related to the central bank’s incentive to compress the wealth distribution through low real interest rates, even in the presence of real (i.e., inflation-indexed) bonds.

Joint work : Sushant Acharya  (Federal Reserve Bank of New York),  Keshav Dogra (Federal Reserve Bank of New-York)


December 16
12:15 pm - 1:30 pm
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Edouard CHALLE
Julien PRAT