Add literature context to Monetary Policy with Heterogeneous Agents

models/We-Would-Like-In-Econ-ARK/GKNMonetaryPolicyHA/GKNMonetaryPolicyHA.ipynb

@@ -19,7 +19,8 @@
    "metadata": {},
    "source": [
     "* Notebook created by Nino Kodua\n",
-    "* October 20, 2020"
+    "* October 20, 2020\n",
+    "* Contributor: Carlos Alba (literature synthesis and revisions)\n"
    ]
   },
   {
@@ -33,7 +34,7 @@
    "cell_type": "markdown",
    "metadata": {},
    "source": [
-    "There is an evidence that even with the low interest rates, monetary policy shocks affect the level of aggegate acitivity, and the distribution of income and consumption across households. This paper analyzes the distributional effects of wealth across socioeconomic groups. It incorporates:\n",
+    "There is an evidence that even with the low interest rates, monetary policy shocks affect the level of aggregate acitivity, and the distribution of income and consumption across households. This paper analyzes the distributional effects of wealth across socioeconomic groups. It incorporates:\n",
     "* New Keynesian sticky price framework (aggregate level)\n",
     "* Imperfect consumption insurance and household heterogeneity - 3 dimensions:\n",
     "    * current potential productivity if employed\n",
@@ -42,7 +43,7 @@
     "* Search and matching frictions (labor market)\n",
     "\n",
     "\n",
-    "Main contributions and attibutes of the paper that differentiate it from the existing literature include:\n",
+    "Main contributions and attributes of the paper that differentiate it from the existing literature include:\n",
     "* Extention of an existing incomplete market general equilibrium models (introduction of nominal frictions)\n",
     "* Impact of monetary policy on economic activity even if the redistribution of wealth is absent\n",
     "* Distributional consequences of the interaction between monetary policy and unemployment\n",
@@ -66,6 +67,22 @@
     "The goal of the paper is to establish the extent to which monetary policy in the US might have distributional effects through the channels included in the model, as well as the impact of monetary policy on inequality."
    ]
   },
+  {
+   "cell_type": "markdown",
+   "metadata": {},
+   "source": [
+    "## Prior Literature"
+   ]
+  },
+  {
+   "cell_type": "markdown",
+   "metadata": {},
+   "source": [
+    "The paper combines two strands of macroeconomics. The first is **New Keynesian monetary policy**: nominal rigidities and interest-rate rules as the main transmission mechanism. Woodford (1998) showed that inflation can be analyzed in a “cashless” setup where the central bank sets interest rates rather than the money supply, which is the standard basis for modern DSGE policy analysis. Much of that work used a representative agent and ignored distribution.\n",
+    "\n",
+    "The second strand is **heterogeneous-agent macroeconomics** with incomplete markets and labor market frictions. Aiyagari (1994) showed that uninsurable idiosyncratic risk and borrowing limits generate precautionary saving and realistic wealth inequality. Later work (e.g. Heathcote, Storesletten, and Violante 2009) clarified how heterogeneity matters for aggregates and welfare. Search and matching were brought into general equilibrium models of unemployment (e.g. Mortensen and Pissarides 1994; Merz 1995), and combined with nominal rigidities (e.g. Walsh 2005; Krause and Lubik 2007; Blanchard and Galí 2010). The distributional effects of inflation and monetary policy were studied in incomplete-markets settings (e.g. Erosa and Ventura 2002; Doepke and Schneider 2006; Meh and Terajima 2011). GKN’s contribution is to integrate heterogeneous households, incomplete markets, and search frictions into a single New Keynesian model, so that the redistributive and welfare effects of monetary policy can be quantified."
+   ]
+  },
   {
    "cell_type": "markdown",
    "metadata": {},
@@ -77,7 +94,7 @@
    "cell_type": "markdown",
    "metadata": {},
    "source": [
-    "In order to introduce earnings heterogeneity, the model introduces labor market search and matching frictions (Mortensen and Pissaridis, 1994) into the heterogeneous agent circumstances (Nakajima, 2012 and Krusell et al., 2010). Producers are monopolistically competitive and face quadratic adjustment costs (Rotemberg 1982)."
+    "In order to introduce earnings heterogeneity, the model introduces labor market search and matching frictions (Mortensen and Pissarides, 1994) into the heterogeneous agent circumstances (Nakajima, 2012 and Krusell et al., 2010). Producers are monopolistically competitive and face quadratic adjustment costs (Rotemberg 1982)."
    ]
   },
   {
@@ -129,7 +146,7 @@
     "* 2 shocks for cyclical fluctuations in the model:\n",
     "    * Z - the aggregate productivity shock\n",
     "    * D - the monetary policy shock\n",
-    "    * $\\mu=(e, s, a) \\in \\mathcal{M}$ - type distribution fof households"
+    "    * $\\mu=(e, s, a) \\in \\mathcal{M}$ - type distribution of households"
    ]
   },
   {
@@ -145,7 +162,7 @@
    "source": [
     "Households are heterogeneous in 3 aspects. A household either works full time or does not work, has a skill level and saves for the future in the mutual fund.\n",
     "* $e \\in\\{0,1\\}$ - Employment status (0: unemployed, 1: employed)\n",
-    "* $s \\in S$ - Exogeneous household skill level\n",
+    "* $s \\in S$ - exogenous household skill level\n",
     "* $a \\in A \\subseteq \\mathbb{R}^{+}$ - Share holdings of a household in the mutual funds."
    ]
   },
@@ -162,7 +179,7 @@
    "metadata": {},
    "source": [
     "1. When households start the period the have information about their employment status, skill level and state of economy.\n",
-    "2. Afterwards, there is a transition - household lose their jobs with exogeneous probability $\\lambda$.\n",
+    "2. Afterwards, there is a transition - household lose their jobs with exogenous probability $\\lambda$.\n",
     "3. Newly employed households - unemployed households search for jobs and are matched to firm vacancies. \n",
     "4. Household consumption and saving decision, and the production process.\n",
     "5. Aggregate shocks\n",
@@ -382,7 +399,7 @@
     "* Households hold assets in the shares in mutual funds\n",
     "* share are traded in a competitive market\n",
     "* 5 types of assets\n",
-    "    * Equity associated with intermedaite goods procuers, final goods producers, capital service producers, and labor service producers\n",
+    "    * Equity associated with intermediate goods producers, final goods producers, capital service producers, and labor service producers\n",
     "    * Bonds - mutual funds can trade with each other\n",
     "* The Central Bank controls rate of return\n",
     "* Equilibrium price of bonds:\n",
@@ -417,7 +434,7 @@
     "* $\\bar{\\Pi}$: inflation target\n",
     "* $\\bar{y}$: output target\n",
     "* D: Persistent monetary policy shocks\n",
-    "    * follows a first-order autogregressive process:\n",
+    "    * follows a first-order autoregressive process:\n",
     "    \\begin{aligned}\n",
     "    \\log \\left(D^{\\prime}\\right)=\\rho_{D} \\log (D)+\\epsilon_{D}, \\text { where } \\epsilon_{D} \\text { is i.i.d. } N\\left(0, \\sigma_{D}^{2}\\right), \\rho_{D} \\in[0,1)\n",
     "    \\end{aligned}"
@@ -498,7 +515,7 @@
    "cell_type": "markdown",
    "metadata": {},
    "source": [
-    "First, the response of the aggregate economy, including output and its compenents, labor market, prices, and assets, to the TFP shocks is reported. (1% TFP shock in period 1)\n",
+    "First, the response of the aggregate economy, including output and its components, labor market, prices, and assets, to the TFP shocks is reported. (1% TFP shock in period 1)\n",
     "\n",
     "Figures present responses in the New Keynesian (NK) model and in the economy without nominal rigidities (RBC). \n",
     "\n",
@@ -548,7 +565,7 @@
     "* Labor income increases by a different degree for different segments of wealth\n",
     "* The lowest percentiles of the wealth distribution show stronger response in terms of all income compared to higher percentiles\n",
     "* Consumption response is also heterogeneous\n",
-    "* The responces of the Gini indexes is mild\n",
+    "* The responses of the Gini indexes is mild\n",
     "    * 1 % TFP shocks results into a fall of the earnings Gini by 0.16 %"
    ]
   },
@@ -596,7 +613,7 @@
     "* Monetary policy tightening reduces demand for labor services\n",
     "* Hiring, vacancy posting and job finding rates fall \n",
     "* Unemployment rate increases by 1.5 %\n",
-    "* Since households are borrowing-constraines, unemployment decreases aggregate demand even further\n",
+    "* Since households are borrowing-constrained, unemployment decreases aggregate demand even further\n",
     "\n",
     "<img src=\"Figure10.png\" width=\"700\"/>\n",
     "\n",
@@ -635,7 +652,7 @@
     "* Income of high-wealth household rises strongly because of an increase in dividends\n",
     "* Income of lower-wealth households declines\n",
     "* Difference in the responce of income betwee the top 5% and the bottom 5% is very significant, 7% (income heterogeneity)\n",
-    "* Consumption declines for the lower-wealth households and is stable for the wealthies\n",
+    "* Consumption declines for the lower-wealth households and is stable for the wealthiest\n",
     "\n",
     "<img src=\"Figure13.png\" width=\"700\"/>\n",
     "\n",
@@ -665,6 +682,20 @@
     "<img src=\"Table7.png\" width=\"450\"/>"
    ]
   },
+  {
+   "cell_type": "markdown",
+   "metadata": {},
+   "source": [
+    "## Subsequent Literature"
+   ]
+  },
+  {
+   "cell_type": "markdown",
+   "metadata": {},
+   "source": [
+    "Later work has extended the analysis of **monetary policy in heterogeneous-agent New Keynesian (HANK) models**. One line of research focuses on transmission mechanisms: how marginal propensities to consume, wealth distributions, and labor income risk change aggregate and distributional responses to monetary shocks (e.g. Herkenhoff 2015; Chen 2018; Alves 2019). Another line deepens the role of **labor market frictions** in HANK models—unemployment risk, job-finding rates, and wage rigidity—and shows that they amplify distributional effects and matter for optimal policy (e.g. Hagedorn 2018; Bertsch 2017; Jones 2017). The frontier combines rich household heterogeneity with empirically grounded labor market dynamics and policy rules; open questions include identification of redistribution channels in the data and the interaction of monetary and fiscal policy in HANK environments."
+   ]
+  },
   {
    "cell_type": "markdown",
    "metadata": {},
@@ -676,11 +707,11 @@
    "cell_type": "markdown",
    "metadata": {},
    "source": [
-    "The monetary policy shocks have significantly different implications in terms of the welfare of different segments of households. While households in the top 5% of wealth distribution see benefits from a contractionary monetary policy, the bottom 5% of wealth distribution faces loses. Therefore, monetary policy affects different households differently and increases earnings, income, wealth and consumption heterogeneity.\n",
+    "The monetary policy shocks have significantly different implications in terms of the welfare of different segments of households. While households in the top 5% of wealth distribution see benefits from a contractionary monetary policy, the bottom 5% of wealth distribution faces losses. Therefore, monetary policy affects different households differently and increases earnings, income, wealth and consumption heterogeneity.\n",
     "\n",
     "* The effects are significant even after the impact of monetary policy on aggregate economy has died out\n",
     "* TFP shocks affect the population more uniformly\n",
-    "* Contractionary monetary policy only benefits the wealthies"
+    "* Contractionary monetary policy only benefits the wealthiest"
    ]
   }
  ],

models/We-Would-Like-In-Econ-ARK/GKNMonetaryPolicyHA/GKNMonetaryPolicyHA_intro.ipynb

@@ -0,0 +1,42 @@
+{
+ "cells": [
+  {
+   "cell_type": "markdown",
+   "id": "d4767a85",
+   "metadata": {},
+   "source": [
+    "# Monetary Policy with Heterogeneous Agents\n",
+    "\n",
+    "Görnemann, Lukas; Kuester, Keith; Nakajima, Makoto (2012).  \n",
+    "Federal Reserve Bank of Philadelphia Working Paper No. 12-14.\n"
+   ]
+  },
+  {
+   "cell_type": "markdown",
+   "id": "d14d83f6",
+   "metadata": {},
+   "source": [
+    "## Original Ballpark Contributor\n",
+    "\n",
+    "Notebook created by: Nino Kodua — October 20, 2020\n"
+   ]
+  },
+  {
+   "cell_type": "markdown",
+   "id": "1c20544a",
+   "metadata": {},
+   "source": [
+    "## Updated by\n",
+    "\n",
+    "Carlos Alba — February 17, 2026\n"
+   ]
+  }
+ ],
+ "metadata": {
+  "language_info": {
+   "name": "python"
+  }
+ },
+ "nbformat": 4,
+ "nbformat_minor": 5
+}

models/We-Would-Like-In-Econ-ARK/GKNMonetaryPolicyHA/GKNMonetaryPolicyHA_prior-literature.ipynb

@@ -0,0 +1,47 @@
+{
+ "cells": [
+  {
+   "cell_type": "markdown",
+   "id": "8dd62b7a",
+   "metadata": {},
+   "source": [
+    "# Prior Literature"
+   ]
+  },
+  {
+   "cell_type": "markdown",
+   "id": "7e085f0b",
+   "metadata": {},
+   "source": [
+    "## Overview of the Prior Literature\n",
+    "\n",
+    "The paper builds on two central strands of macroeconomic research. The first is the New Keynesian literature on monetary policy with nominal rigidities, in which interest-rate rules govern inflation and output dynamics {cite:t}woodford1998}. This framework established how central banks can stabilize inflation and output in models with sticky prices.\n",
+    "\n",
+    "The second strand is heterogeneous-agent macroeconomics with incomplete markets. The canonical incomplete-markets model of precautionary saving under idiosyncratic risk is due to {cite:t}aiyagari1994}, which shows how borrowing constraints and uninsurable income shocks generate wealth inequality. Subsequent work, including {cite:t}heathcote2009}, emphasized the quantitative importance of heterogeneity for aggregate outcomes and welfare.\n"
+   ]
+  },
+  {
+   "cell_type": "markdown",
+   "id": "e91d0806",
+   "metadata": {},
+   "source": [
+    "## Key Foundational Papers and Their Contributions\n",
+    "\n",
+    "- {cite:t}Clarida1998-sk} — Established the empirical and theoretical foundation for monetary policy rules in New Keynesian models.\n",
+    "\n",
+    "- {cite:t}Clarida2000-pd} — Provided a systematic treatment of monetary policy under rational expectations and nominal rigidities.\n",
+    "\n",
+    "- {cite:t}Andolfatto1996-gw} — Introduced search-and-matching frictions into real business cycle models, forming the basis for incorporating unemployment dynamics into DSGE frameworks.\n",
+    "\n",
+    "- {cite:t}Doepke2006-sm} — Analyzed the redistributional consequences of inflation across heterogeneous households, directly connecting monetary policy to inequality."
+   ]
+  }
+ ],
+ "metadata": {
+  "language_info": {
+   "name": "python"
+  }
+ },
+ "nbformat": 4,
+ "nbformat_minor": 5
+}

models/We-Would-Like-In-Econ-ARK/GKNMonetaryPolicyHA/GKNMonetaryPolicyHA_subsequent-literature.ipynb

@@ -0,0 +1,49 @@
+{
+ "cells": [
+  {
+   "cell_type": "markdown",
+   "id": "100e0de1",
+   "metadata": {},
+   "source": [
+    "# Subsequent Literature"
+   ]
+  },
+  {
+   "cell_type": "markdown",
+   "id": "0129cb23",
+   "metadata": {},
+   "source": [
+    "## Overview of How the Paper Has Been Built Upon\n",
+    "\n",
+    "Following {cite:t}monetary_gornemann_2012}, a growing literature has developed heterogeneous-agent New Keynesian (HANK) models to study the distributional and aggregate consequences of monetary policy. These models extend the framework of {cite:t}monetary_gornemann_2012} by incorporating richer household heterogeneity, empirical marginal propensities to consume, and more detailed labor market dynamics.\n",
+    "\n",
+    "Subsequent research emphasizes how credit constraints, labor market risk, and unemployment interact with monetary transmission. For example, {cite:t}credit_herkenhoff_2015} and {cite:t}monetary_bertsch_2017} examine the role of borrowing constraints and balance sheets in shaping policy effects."
+   ]
+  },
+  {
+   "cell_type": "markdown",
+   "id": "21be8cd0",
+   "metadata": {},
+   "source": [
+    "## Key Subsequent Papers and Their Contributions\n",
+    "\n",
+    "- {cite:t}prices_hagedorn_2018} — Integrates unemployment risk and wage rigidity into heterogeneous-agent monetary models.\n",
+    "\n",
+    "- {cite:t}computational_chen_2018} — Develops computational techniques for solving large-scale heterogeneous-agent DSGE models.\n",
+    "\n",
+    "- {cite:t}eitc_jones_2017} — Explores redistribution and policy design in heterogeneous-agent environments.\n",
+    "\n",
+    "- {cite:t}look_alves_2019} — Investigates monetary policy transmission in models with wealth heterogeneity and imperfect insurance.\n",
+    "\n",
+    "- {cite:t}monetary_rakviashvili_2020} — Studies extensions of HANK models and their quantitative implications."
+   ]
+  }
+ ],
+ "metadata": {
+  "language_info": {
+   "name": "python"
+  }
+ },
+ "nbformat": 4,
+ "nbformat_minor": 5
+}