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Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach

Sterk, V; Ravn, MO; (2021) Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach. Journal of the European Economic Association , 19 (2) pp. 1162-1202. 10.1093/jeea/jvaa028. Green open access

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Abstract

Recently developed HANK models, which combine Heterogeneous Agents and New Keynesian frictions, have had a considerable impact on macroeconomics. However, due to the complexity of such models, the literature has focused on numerically solved models and therefore little is known about their general properties. This paper presents a tractable HANK model which integrates Search and Matching (SAM) frictions in the labor market. The model features endogenous idiosyncratic earnings risk which may be procyclical or countercyclical. When this risk is countercyclical, which we argue is the empirically plausible case, there is downward pressure on real interest rates in recessions due to a precautionary saving motive. We show that in this setting (a) the economy may get stuck in a high-unemployment steady state, (b) the Taylor principle is insufficient to eliminate local indeterminacy of the intended steady state, and (c) nominal rigidities and incomplete markets are complementary in terms of amplifying the impact of shocks on the macro economy.

Type: Article
Title: Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach
Open access status: An open access version is available from UCL Discovery
DOI: 10.1093/jeea/jvaa028
Publisher version: https://doi.org/10.1093/jeea/jvaa028
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10091485
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