Precautionary saving and un-anchored expectations

Arbeitspapier

This paper investigates monetary policy in a heterogeneous agent new Keynesian (HANK) model where agents face idiosyncratic income risk and use adaptive learning in order to form their expectations. Households experience different histories and observe different idiosyncratic variables. This gives rise to idiosyncratic learning processes, which naturally implies the existence of heterogeneous expectations. In HANK models, supply shocks generate precautionary saving. The learning setup amplifies this effect and can result in long-lasting disinflationary traps. Dovish Taylor rules focused on closing the output gap dampen the learning effects. Price level targeting improves the inflation and output stabilization trade-off by better anchoring expectations.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECON WPS - Working Papers in Economic Theory and Policy ; No. 08/2021

Classification and Topics

• Classification: Wirtschaft ; Aggregate Factor Income Distribution ; Price Level; Inflation; Deflation ; Monetary Policy ; Macro-Based Behavioral Economics: General‡
• Subject: adaptive learning ; precautionary saving ; restricted perception equilibrium ; heterogeneous expectations ; heterogeneous agent

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Grimaud, Alex
• Event: Veröffentlichung
• (who): TU Wien, Institute of Statistics and Mathematical Methods in Economics, Research Unit in Economics
• (where): Vienna
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/245803
• Last update: 10.03.2025, 11:45 AM CET