Staff Reports
Optimal Monetary Policy According to HANK
Number 916
February 2020

JEL classification: E21, E30, E52, E62

Authors: Sushant Acharya, Edouard Challe, and Keshav Dogra

We study optimal monetary policy in a heterogeneous agent new Keynesian economy. A utilitarian planner seeks to reduce consumption inequality, in addition to stabilizing output gaps and inflation. The planner does so both by reducing income risk faced by households, and by reducing the pass-through from income to consumption risk, trading off the benefits of lower inequality against productive inefficiency and higher inflation. When income risk is countercyclical, policy curtails the fall in output in recessions to mitigate the increase in inequality. We uncover a new form of time inconsistency of the Ramsey plan—the temptation to exploit households' unhedged interest rate exposure to lower inequality.

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AUTHOR DISCLOSURE STATEMENT(S)
Sushant Acharya
The authors declare that they have no relevant or material financial interests that relate to the research described in this paper.

Edouard Challe
I hereby certify that I have received no funding from an interested party in relation to the work entitled “Optimal Monetary Policy According to HANK.”

Keshav Dogra
The authors declare that they have no relevant or material financial interests that relate to the research described in this paper.