On the Interactions Between Monetary Policy, Distributions and General Equilibrium

The project addresses the interaction between monetary policy, general equilibrium repercussions and the intra- and inter-generational distribution of income and wealth. The main objective is to provide a quantitative model to investigate the implications of (i) conventional and unconventional monetary policy measures on interest rates, asset returns, wages and growth, (ii) the feedback effect of these variables on the inter- and intra-generational distributions of income and wealth and (iii) how the monetary transmission mechanism is influenced by the endogenous distribution of income and wealth. The project relates to a growing literature employing so called HANK (=Heterogeneous Agents New Keynesian) models that merges the heterogeneous agents literature by explicitly modeling how distributions of income and wealth evolve endogenously with the New Keynesian literature by modeling sticky prices and wages through which monetary policy has real economic implications. As a first step, we will review this literature to identify the key channels that are currently missing from this merger. Given our current knowledge of the existing papers this is mainly (i) an explicit distinction between intra- and inter-generational distributional effects, (ii) an appropriate comparison to New Keynesian models with fixed types in order to quantify the role played by the endogeneity of distributions, (iii) an investigation of multiple shocks leaving the current almost exclusive focus on monetary policy shocks and (iv) a realistic modelling of beliefs that is consistent with expectations data. Once this is complete, we plan to develop a quantitative overlapping generations model with additional intra-generational heterogeneity, income risk, credit market frictions, incomplete markets, multiple assets and idiosyncratic as well as aggregate shocks in order to quantitatively investigate the importance of the aforementioned interaction between monetary policy and endogenously evolving distributions of income and wealth in general equilibrium. In addition, we plan to develop a HANK model, in which households are heterogeneous in terms of their income shocks and in terms of their beliefs. We want to understand how these two types of heterogeneity, which are both features of the data, jointly affect the transmission of monetary policy..