HANK Comes of Age

Abstract

We study monetary policy in a heterogeneous agent New Keynesian model that represents the life cycle of households. The model matches the distribution of labor income and wealth by age. It also produces a realistic distribution of MPCs. Monetary policy shocks affect young households mainly through labor income and old households mainly through asset returns. Most young households are hand-to-mouth and benefit from rising labor demand. Older households receive lower returns on their retirement savings. Almost all of the aggregate consumption response comes from working-age households. An unanticipated monetary easing redistributes welfare from the wealthiest old to the poorest young.