Working papers
The role of the wealthy hand-to-mouth in monetary policy transmission
Abstract: This paper studies a three-agent New Keynesian (THRANK) model that offers a tractable approximation to two-asset heterogeneous agent New Keynesian (HANK) frameworks. The model is especially useful for clarifying the role that the wealthy hand-to-mouth households play in monetary policy shock transmission. First, I demonstrate that a one-asset version of the model replicates all key redistribution channels identified by Auclert (2019) within a simplified structure. Next, I extend the framework to include housing as an illiquid asset. This richer structure allows the model to replicate the dynamics of two-asset HANK models while remaining transparent. The model highlights how heterogeneity in asset positions and borrowing constraints shape the marginal propensities to consume (MPC) and the transmission of monetary policy. Finally, I show analytically how collateral constraints shape the response of the wealthy hand-to-mouth and the aggregate economy by introducing an additional income channel and by increasing their MPC.
Resolving New Keynesian Puzzles with Chris Gibbs (University of Sydney) and Nigel McClung (Bank of Finland)
Abstract: New Keynesian models generate puzzles when confronted with the zero lower bound (ZLB) on nominal rates, such as the forward guidance puzzle and the paradox of flexibility. We show that these puzzles are resolved when monetary policy maintains a consistent history-dependence before, during, and after a ZLB episode. History dependent policy is both welfare-maximizing in theoretical models and an empirically supported description of real-world monetary policy. We show how to write monetary policy rules that preserve the same history dependence and policy objectives with and without the ZLB to resolve the puzzles in any New Keynesian model.
The Composition of Trade and the Cyclicality of the Trade Balance
Abstract: This paper studies how asymmetries in the cyclicality of exports and imports shape the behavior of the trade balance over the business cycle. In standard open-economy models and in historical data, the trade balance tends to move countercyclically to the business cycle. I document a reversal of this pattern since the 1980s, as many countries now exhibit a positive correlation between GDP and the trade balance. I show that this shift is explained by differences in trade composition. When a country’s exports are more cyclical than its imports, because it exports a larger share of investment goods than it imports, it experiences a more procyclical trade balance. I develop a two-country international RBC model that matches this behavior and shows how relative trade composition determines the magnitude of the GDP–trade balance correlation and amplifies output volatility in export-oriented economies.
Old: Monetary Policy, Agent Heterogeneity and Inequality – Insights from a Three-Agent New Keynesian Model (ECB Working Paper N0. 2590)
Abstract: In this paper I develop a New Keynesian dynamic stochastic general equilibrium model which features three different types of representative agents (THRANK): the poor hand-to-mouth, the wealthy hand-to-mouth and the non-hand-to mouth households. Compared to a full-scale HANK model, this model is easier to compute while reproducing many of the same monetary policy shock transmission channels. I show that monetary policy transmission takes place through a redistribution channel, as emphasised by Auclert (2019). In particular, the effects of a monetary policy shock are amplified as resources are redistributed from high-MPC households to low-MPC households. Monetary policy therefore becomes more effective compared to models with homogeneous MPC rates. Consumption inequality is countercyclical in this setting and a high degree of leverage amplifies the redistribution channel. These findings have important implications for understanding the effects of both monetary and macroprudential policy.