Optimal Monetary Policy with Heterogeneous Agents : A Timeless Ramsey Approach

This paper characterizes optimal monetary policy in a canonical heterogeneous-agent New Keynesian (“HANK”) model with wage rigidity. We develop a timeless Ramsey approach to study optimal long-run policy, time inconsistency, and optimal stabilization policy, as well as optimal policy under discretion. We show that i) zero inflation is the optimal long-run policy in our baseline model, ii) the standard inflation target is augmented by distributional considerations, iii) monetary policy in HANK faces a second source of time inconsistency that requires a new distributional target, iv) Divine Coincidence fails in heterogeneous-agent economies due to pecuniary externalities even in the absence of cost-push shocks, and v) there are gains from commitment relative to discretion even in the absence of cost-push shocks. We compute optimal stabilization policy in response to productivity, demand, and cost-push shocks both non-linearly and using sequence-space perturbation methods, which we extend to Ramsey problems and welfare analysis