Inequality and Macroeconomic Fluctuations and Policies: A Tractable Heterogeneous-Agent New Keynesian Approach

Introduction

This course will be delivered in cooperation with guest lecturer, Professor Florin O. Bilbiie, from the University of Cambridge. The course takes place in cooperation with Norges Bank and will be hosted by Norges Bank, 13th-16th of May 2024.

Course content

1: Introduction.
Modern Macroeconomics is the journey from Aggregate to Aggregate Demand and Supply. Stylized facts: micro and macro

2: The Representative-Agent New Keynesian Model (RANK)--Why Go Beyond?
A Keynesian-Cross representation.
Lack of Keynesian Cross. Lack of General-Equilibrium. Fiscal Multipliers.
Forward Guidance Puzzle.
Liquidity Traps and neo-Fisherian effects. Literature review,

3: A Benchmark Two-Agent (TANK) Model: both Keynesian & General-Equilibrium
​Deriving AggregateD Demand, Aggregate Euler equation, Reviving the Keynesian Cross and General Equilibrium.Amplification and Dampening. Monetary policy, decomposition Partial versus General-Equilibrium (direct vs indirect effects, Kaplan Moll Violante). Keynesian cross representation.
Fiscal multipliers: government spending. Fiscal transfers. "Inverted Keynesian logic" and the paradox of thrift.
Forward guidance: still a puzzle.
Literature review.

4: Introducing Risk and Precautionary Saving: a Tractable, Two-State, Two-Asset Heterogeneous-Agent New Keynesian (THANK) Model - without Liquidity
From TANK towards HANK: idiosyncratic risk and precautionary saving. The Aggregate Euler equation: discounting or compounding?
Determinacy, Taylor rule and price level targeting. Cyclicality of inequality and risk.
Other tractable models of cyclical risk, e.g. unemployment (Ravn Sterk, Challe, Werning, Acharya Dogra)
A Catch-22: curing the forward guidance puzzle vs amplification. Euler-equation wedges and measurement.
Application: Liquidity traps. Deep recessions without deflation. Inequality and risk as triggers of liquidity traps. Forward guidance and its power in a liquidity trap.
Literature review

5: Introducing Liquidity in THANK
Liquid bonds, a simplified Bewley-Aiyagari-Hugget economy, Deriving the demand for bonds/liquidity/savings.
iMPCs and intertemporal propagation (Auclert Rognlie Straub): role for fiscal multipliers, determinacy. Determining the price level by fixing the nominal quantity of bonds (Hagedorn).
Literature review

6: Extensions and Evidence: Capital Investment, Sticky Wages, Labor Supply, Estimation
The Role of Physical Capital {Investment): Illiquid Wealth Inequality; Resuscitating the Samuelson Multiplier-Accelerator. The multiplier of the multiplier - an aggregate-demand complementarity.
Sticky wages: dampening or amplification with heterogeneity? The cyclicality of profits Labor Supply: Income effects and Complementarity with Nonseparable utility.
Empirical Evidence: Micro data-based; Macro Estimation of HANK models.
Literature review

7: Optimal Monetary & Fiscal Policy in T(tractable)HANK
The Ramsey Problem in a Two-Agent Economy
Second-order approximation of aggregate welfare: the inequality motive
Optimal monetary policy with the inequality motive: a linear-quadratic problem. The irrelevance of risk: a benchmark.
Optimal policy in a Liquidity trap: Optimal forward guidance duration. Implications of a liquidity motive: optimal policy with long-run inequality.
Quantitative easing.
Stabilization vs Redistribution: Optimal monetary and fiscal policy. Separation results
Literature review

8: "Aggregate Supply"; Firm Entry/Exit, Product Creation/destruction, Variety
Inequality and the COVID-19 pandemic. Supply shocks with and without heterogeneity. Sectoral reallocations, substitution and complementarity. Firm entry and exit.
Endogenous entry, product variety and business cycles; (optimal) monetary policy. Fiscal policy
Entry-exit as an amplification mechanism.