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Let me introduce you to Hank. It is a macroeconomics project that, according to a Nobel laureate, has an “electric charge”. It continues to be involved in things like the Federal Reserve Board, the European Central Bank and the Bank of England. And it’s one of the few acronyms that economists deserve an apology for. “Heterogeneous Agent New Keynesian” does not roll off the tongue well.
The goal is to combine macroeconomics with inequality data. Instead of boiling customers down to a typical “agent”, Hank’s models include a full distribution of people, whose consumption may depend on whether they are underwater on their mortgage, whether they are exposed to the shock of inflation, the risk of losing them. work – and third party cooperation.
Interest increased after the global financial crisis. May Rostom, the head of macro-modelling for the Bank of England, points out that the big brokers were struggling to show the big impact of a small group of people, who couldn’t borrow, returning the money of the see. He says Hank’s models are “a big deal”.
Recent questions include how demand is affected by an unevenly distributed fiscal stimulus, as well as whether rich and poor households are affected differently by rising prices.
Matthew Rognlie of Northwestern University says that more broadly, Hank’s approach tapped into a “well of dissatisfaction” with old, simple forms. Those consumers assume that they respond strongly to changes in interest rates, and do not change their income at all. It’s almost like my one year old’s example where 100% of his food goes in his mouth.
Hank’s models try to match actual spending patterns more closely, taking the willingness to spend 10 times more than the old models.
That changes the emphasis when thinking about monetary policy transfers, away from the idea that large savings incentives encourage more. Other methods could include interest rate increases that hit people with different mortgages who live hand-to-hand, reducing spending. Or lowering interest rates can stimulate investment, raising the incomes of people who are likely to shrink, increasing spending.
All these problems may seem difficult for central banks, since they suggest that the transmission of monetary policy depends on factors beyond their control. If the channel closes – for example, if investment is slow to respond to a change in interest rates, capital expenditure may need to reduce profits more strongly.
Another difference is in the treatment of monetary policy. Those simple models assume stimulus checks are weak, as people expect future tax increases to pay for them, and save their lives. Under Hank’s models, if the government gives money to people who are willing to spend it, overall performance can be boosted. For some purposes, monetary policy is less useful than monetary policy, which can be targeted at the most needy and expendable.
Extending economists’ models to reflect the range of household differences makes sense. So why hasn’t Hank taken over yet? Despite the great advances in technology, they are still difficult to deal with technology. The European Central Bank recently admitted that more work was needed before euro area statistics could be compiled and the results released.
Despite including more information, there are still places where such examples seem to be out of touch with actual analysis. They don’t understand the fact that individual consumption can take time to respond to a change in interest rates. And worryingly, a staff report from the New York Federal Reserve found that Hank’s famous model was “much worse” at predicting consumption than its predecessor.
Although it seems clear that reporting on inequality is important, it is not yet clear that economists have arrived at the right way to do it. Finally, drawing one part of simplified models closer to reality will be reduced if other parts are wrong. Ben Moll of the London School of Economics recently suggested that rational expectations theory should be discarded, as it requires people to have a full distribution of inequality on their heads.
While emphasizing the power of monetary policy and the importance of inequality, the cynical analysis of Hank’s boom is that it only brings the theory of macroeconomics to accelerate its process. Even if there is a certain way to go, it is to go in the right way.
soumaya.keynes@ft.com
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