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Fabian Seyrich, M.Sc.

Berlin School of Economics, Germany

Authors: Fabian Seyrich, Oliver Pfäuti

Abstract: We analyze how cognitive discounting and household heterogeneity affect the transmission of monetary policy. Under cognitive discounting, households’ expectations exhibit an underreaction to news about the aggregate economy, which is consistent with empirical evidence on household expectations. Our model simultaneously accounts for recent empirical findings of the transmission of monetary policy: (i) monetary policy affects consumption largely through indirect effects, (ii) households are unequally exposed to aggregate fluctuations and income risk is countercyclical, (iii) forward guidance is less powerful than contemporaneous monetary policy, (iv) and the economy remains stable at the zero lower bound. In contrast to demand shocks, supply shocks are amplified through both, cognitive discounting and household heterogeneity, such that inflation increases more than twice as strong as when abstracting from cognitive discounting and household heterogeneity. 

JEL Classification: E21, E52, E62, E71
Keywords: Monetary Policy, Heterogeneous Households, Behavioral Macroeconomics, Forward Guidance, Lower Bound, Inflation, Macroeconomic Stabilization

Full Text: A Behavioral Heterogeneous Agent New Keynesian Model