HANK beyond FIRE: Amplification, forward guidance, and belief shocks

HANK beyond FIRE: Amplification, forward guidance, and belief shocks

Series: Working Papers. 2418.

Author: José-Elías Gallegos.

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Abstract

The transmission channel of monetary policy in the benchmark New Keynesian (NK) framework relies on the counterfactual Full Information Rational Expectations (FIRE) assumption, particularly at the general equilibrium (GE) dimension. I relax the Full Information assumption and build a Heterogeneous-Agents NK model under financial frictions and dispersed information. I find that the amplification multiplier of monetary policy is dampened by the lessened role of GE effects. I then conduct the standard full-fledged NK analysis: the determinacy region is widened as a result of as if aggregate myopia, and the framework beyond FIRE does not suffer from the forward guidance puzzle. Finally, I find that transitory “animal spirits” shocks generate persistent effects.

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