Behavioral pattern of heterogeneous agent and optimal monetary policy for solving heterogeneous expectation model

Document Type : Research Article

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Assistant Professor

Abstract

The use of agent-based models on the heterogeneous behavior of agents has expanded considerably over the past years. This paper investigates the model based on the behavior of agents and considers the heterogeneity of agent models. In this study, we examine the effect of different forming of individuals'' expectations on macroeconomic variables and the re-distributional effects of monetary policy. This paper revisit the transmission mechanism from monetary policy to household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of wealth and marginal propensities to consume because of two features: uninsurable income shocks and multiple assets with different degrees of liquidity and different returns. In this model, the indirect effects of an unexpected monetary policy, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in Representative Agent New Keynesian (RANK) economies, where the substitution channel drives virtually all of the transmission from monetary policy to consumption then failure of Ricardian equivalence implies that, in HANK models, the fiscal reaction to the monetary expansion is a key determinant of the overall size of the macroeconomic response. The results indicate that under discretionary circumstances, the attempt of the monetary authority to redistribute wealth to the borrower''s households, which have a higher utility of net wealth than the other households, leads to changes in inflationary biases. However, under commitment circumstances, this inflationary pressure will be offset by changes in expectations for future inflation over time.

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References

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Journal of Applied Economics Studies in Iran
Volume 8, Issue 32
January 2020
Pages 19-47

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