Excerpt
August 2024, Paper: "In the past decade, a new paradigm for fiscal and monetary policy analysis has emerged, combining the canonical macro model of income and wealth inequality with the New Keynesian model. These Heterogeneous-Agent New Keynesian (“HANK”) models feature new transmission channels and allow for the joint study of aggregate and distributional effects of shocks and policies. We review key developments in this literature through the lens of a unified “canonical HANK model”. Monetary and balanced-budget fiscal policy have similar aggregate effects as in the standard new Keynesian model, while deficit-financed fiscal policy is much more expansionary. We discuss the split between direct and indirect effects of policy, and the implications of cyclical income risk, maturity structure, nominal assets, illiquid accounts, behavioral frictions, and endogenous portfolio choice. Throughout, we highlight the benefits of working in the sequence space when solving and analyzing this class of models."