European Commission logo
English English
CORDIS - EU research results
CORDIS

Heterogeneity, Monetary Policy and Economic Fluctuations

Project description

A closer look at HANK, RANK and TANK

The standard New Keynesian paradigm serves as the foundation of policy analysis in almost all central banks around the world. However, recent economic events are challenging the standard macroeconomic models. The EU-funded HEMPEF project will develop an 'organising framework' focussing on the distinction between two types of agents of households or firms: those that are 'unconstrained' and those that are 'constrained'. With a focus on recent HANK (Heterogeneous Agent News Keynesian) models, the project will analyse this wedge and its components in order to understand the channels through which heterogeneity operates. It will also conduct a comparative analysis of the aggregate equilibrium dynamics of HANK and TANK (Two Agent New Keynesian) models. The latter, which preserve the tractability and ease of interpretation of the standard Representative Agent New Keynesian (RANK) model, restrict the heterogeneity to the presence of two types of agents (constrained and unconstrained).

Objective

The proposed research aims at assessing the role of heterogeneity in economic fluctuations and its implications for monetary policy, with a focus on recent HANK (for Heterogeneous Agents New Keynesian) models.

A first objective is the development of an “organizing framework” which focuses on the distinction between two types of agents of households (or firms) at any point in time: those who satisfy an intertemporal optimality condition (labeled as “unconstrained”) and those who do not (labeled as “constrained”). A heterogeneity wedge can be defined that accounts for the differential behavior of aggregate consumption (or investment) relative to an economy with a representative household (or firm). The analysis of that wedge and its components should help understand the channels through which heterogeneity operates, both in the context of specific HANK models as well as actual economies (using household or firm-level panel data).

A second objective is the conduct of a comparative analysis of the aggregate equilibrium dynamics of HANK and TANK (for Two Agent New Keynesian) models. The latter class of models, which preserve the tractability and ease of interpretation of the standard Representative Agent New Keynesian (RANK) model, restrict the heterogeneity to the presence of two types of agents (constrained and unconstrained), with a constant share of each in the population. The key question to be studied is the extent to which some version of a TANK model may provide a good approximation to the dynamics of existing HANK models, as well as a better data fit than their RANK counterparts.

Several applications are proposed, including the analysis of the role of constrained households in shaping the gains from wage flexibility and in determining the effects of helicopter drops on the economy, as well as the study of the impact of heterogeneity on the nature of the optimal monetary policy.

Host institution

Centre de Recerca en Economia Internacional (CREI)
Net EU contribution
€ 923 750,00
Address
RAMON TRIAS FARGAS 25/27
08005 Barcelona
Spain

See on map

Region
Este Cataluña Barcelona
Activity type
Research Organisations
Links
Total cost
€ 923 750,00

Beneficiaries (1)