Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/248316 
Year of Publication: 
2021
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2021-55
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We study optimal monetary policy in an analytically tractable Heterogeneous Agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from that in a representative agent model because monetary policy can affect consumption inequality by reducing both idiosyncratic consumption risk and the inequality that arises from households' unequal exposures to aggregate shocks. Simple target criteria summarize the planner's tradeoff between consumption inequality, productive efficiency and price stability. Mitigating consumption inequality requires putting some weight on stabilizing the level of output and correspondingly reducing the weights on the output gap and the price level relative to an economy without inequality.
Subjects: 
Economic models
Monetary policy
JEL: 
E21
E30
E52
E62
E63
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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