Series: Featured research.
Author: Jesús Fernández-Villaverde, Joël Marbet, Galo Nuño y Omar Rachedi.
Summary
We study how household inequality shapes the effects of the nominal interest rate zero lower bound (ZLB) on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve the model non-linearly using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households’ precautionary saving by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e. the extent to which monetary policy shifts the long-run real rate (natural rate) of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality.