Heterogeneity in New Keynesian Models : Monetary Policy Implications from HANK and TANK Approaches

This thesis explores the implications of Heterogeneous Agent New Keynesian (HANK) models for monetary policy by analyzing the existing literature and proposing a structural modification to a Two-Agent New Keynesian (TANK) model. The literature review offers an overview of the results of HANK models, starting from early contributions that first combined heterogeneity with nominal rigidities, revealing transmission channels of monetary policy that cannot be assessed with a representative agent framework. Subsequent studies build and use the HANK framework to examine these transmission channels more deeply, identifying the significant role of distributional effects in how monetary policy is transmitted to aggregate macroeconomic variables. The review also discusses the optimal monetary policy in HANK models, which focuses on minimizing idiosyncratic risk at the cost of inflation stability, and the role of HANK models in addressing the forward guidance puzzle. The thesis further examines TANK models as a simpler alternative to HANK models still being sufficient for capturing the effects of heterogeneity in New Keynesian models. By modifying a TANK model, this thesis aims to better align heterogeneity assumptions with empirical evidence on household types, particularly with the so-called wealthy hand-to-mouth households. This modification leads to the identification of a new feedback loop channel where investments in physical capital amplify the responses of aggregate variables. However, a structural dilemma arises where calibrations cannot guarantee the desired non-Ricardian response of consumption with a negative investment response. The thesis contributes to the understanding of the results and implications of different variations of HANK models for monetary policy, complementing existing theoretical discussions, and demonstrates the importance of heterogeneity assumptions in New Keynesian models