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Micro Jumps, Macro Humps: Monetary Policy and Business Cycles in an Estimated HANK Model

Jan 2020
Working Paper
20-002
By  Adrien Auclert, Matthew Rognlie, Ludwig Straub
We estimate a Heterogeneous-Agent New Keynesian model with sticky household expectations that matches existing microeconomic evidence on marginal propensities to consume and macroeconomic evidence on the impulse response to a monetary policy shock. Our estimated model uncovers a central role for investment in the transmission mechanism of monetary policy, as high MPCs amplify the investment response in the data. This force also generates a procyclical response of consumption to investment shocks, leading our model to infer a central role for these shocks as a source of business cycles.