The Czech Monetary Policy through the Lens of the HANK Model

• Název práce v češtině: The Czech Monetary Policy through the Lens of the HANK Model
• Název v anglickém jazyce: The Czech Monetary Policy through the Lens of the HANK Model
• Akademický rok vypsání: 2023/2024
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: PhDr. Jaromír Baxa, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 26.02.2024
• Datum zadání: 26.02.2024

Zásady pro vypracování

Main questions:

1. Whether “TANK approximates reasonably well implications of HANK” as mentioned in Debortoli, Galí (2018), particularly in the context of the analytical solution suggested by Auclert (2019) as used in Slacalek (2020).

2. What is, in terms of HtM and non-HtM, the decomposition of households in the Czech Republic? How do different channels of monetary policy contribute to changes in consumption expenditures in various types of households?

Seznam odborné literatury

Slacalek, J., O. Tristani, & G. L. Violante (2020): „Household balance sheet channels of monetary policy: A back of the envelope calculation for the euro area.“ Journal of Economic Dynamics and Control 115: p. 103879.
Auclert, A. (2019): „Monetary policy and the redistribution channel.“ American Economic Review 109(6): pp. 2333-2367.
Kaplan, G., B. Moll, & G. L. Violante (2018): „Monetary policy according to HANK.“ American Economic Review 108(3): pp. 697-743.
Debortoli, D. & J. Galí (2017): „Monetary policy with heterogeneous agents: Insights from TANK models.“.
Kaplan, G., G. L. Violante & J. Weidner (2014): „The wealthy hand-to-mouth“ Technical report, National Bureou of Economic Research.
Kaplan, G. & G. L. Violante (2018): „Microeconomic heterogeneity and macroeconomic shocks.“ Journal of Economic Perspectives 32(3): pp. 167-194.
Kaplan, G. & G. L. Violante (2014): „A model of the consumption response to fiscal stimulus payments.“ Econometrica 82(4): pp. 1199-1239.
Violante, G. L. (2021): „What have we learned from HANK models, thus far?“ Beyond the pandemic: the future of monetary policy p. 267.
Lenza, M. & J. Slacalek (2023): „How Does Monetary Policy Affect Income and Wealth Inequality? Evidence from Quantitative Easing in the Euro Area Online Appendix.“.

Předběžná náplň práce

Hypothesis.

In recent years, the field of macroeconomic modelling has witnessed a notable evolution, especially due to the emerging prominence of Heterogeneous Agent New Keynesian (HANK) models. This evolution, driven partially by advancements in computational technology and the availability of high-quality microdata, marks a pivotal moment in macroeconomic research. HANK models offer an understanding of how heterogeneity across macroeconomic agents influences macroeconomic outcomes. This heterogeneity can stem from various sources; however, literature frequently introduces hand-to-mouth (HtM) households with a high marginal propensity to consume as a complement to traditional non-HtM households. My thesis will focus exclusively on this source of heterogeneity. The usability of HANK’s simplified version, Two Agent New Keynesian (TANK) models, is the first subject I intend to explore in detail in my thesis. Departure from Representative Agent New Keynesian (RANK) models leads to a more realistic depiction of complex transmission mechanisms of monetary policy, the second main topic of my work. A thorough knowledge of transmission mechanisms is crucial for policy conduct, and an improved modelling framework can serve as a tool for an analysis of the recent turbulent period of macroeconomic development. While the application of HANK models experiences certain limitations, I consider it essential to strive for progress in this area, which might be of a special interest in the Czech environment, given the specifics of its overall macroeconomic situation and the sovereign role of the Czech National Bank. I hope that my thesis will provide at least a small contribution to this vibrant field.

Methodology:

The analytical decomposition will be built predominantly on Auclert (2019) and Kaplan et al. (2018) and will elaborate on model’s assumptions, especially those distinct from Debortoli & Galí (2018). This shall allow me to discuss, or even verify whether TANK reasonably well approximates implications of HANK models in my particular specification. The crucial assumptions will be those regarding idiosyncratic and aggregare risk, as those are not considered in decomposition of Slacalek et al. (2020), who also draws from Auclert (2019) and Kaplan et al. (2018). I will comment on modelling implications of division of HtM households into poor and wealthy, as suggested by Kaplan et al. (2014).

In order to study the second question, I am planning to closely follow Slacalek et al. (2020). I will apply the analytical decomposition from previous part on empirical data, specifically the fourth wave of Household Finance and Consumption Survey (HFCS), which includes data for Czech Republic. This approach allows to decompose effect of monetary policy on consumption into direct and indirect effects and their subchannels. Given this foundation, I will be able to elaborate on implications of such modelling tool for monetary policy, possibly on events of recent macroeconomic landscape. I am also intending to validate the results following from HANK models by consumption responses estimated by VAR.

Expected Contribution:

The expected contribution of my thesis is twofold. First, my work shall utilize recent literature on analytical solutions of HANK models and at least aim towards the evaluation of Debortoli & Galí‘s (2018) statement by examining the extent to which TANK models can reasonably approximate the dynamics captured by more sophisticated HANK framework. This analysis will shed light on the validity and limitations of TANK models, providing insights into their practical utility. In order to comprehensively describe the model’s structure and provide a valid comparison, the assumptions of these models have to be examined in detail. The main objective, and also the core contribution of this section, is to obtain a model which represents the heterogeneity of macroeconomic agents while relying on reasonable assumptions in line with the literature.

Secondly, the application of the analytical decomposition on a relatively new dataset of Czech households is a novel contribution. The empirical aspect of my thesis puts model outcomes in use for potential optimization of monetary policy. The decomposition of channels through which monetary policy operates and assessment of their relative strengths for different types of households shall lay the ground for broader discussion of monetary policy in high and low inflation regimes in reference to macroeconomic development in the last decade. Finally, the results shall be challenged by the VAR model, mainly to check the robustness of my methods.