Macroeconomic Fluctuations with Hank & Sam: An Analytical Approach

Author(s)
Morten O. Ravn, Vincent Sterk

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 insufcient 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. (JEL: E10, E21, E24, E30, E52)

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