Editing New Keynesian economics (section)

=== 2010s ===
The 2010s saw the development of models incorporating household heterogeneity into the standard New Keynesian framework, commonly referred as 'HANK' models (Heterogeneous Agent New Keynesian). In addition to sticky prices, a typical HANK model features uninsurable idiosyncratic labor income risk which gives rise to a non-degenerate wealth distribution. The earliest models with these two features include Oh and [[Ricardo Reis|Reis]] (2012),<ref>{{Cite journal|last1=Oh|first1=Hyunseung|last2=Reis|first2=Ricardo|date=February 2011|title=Targeted Transfers and the Fiscal Response to the Great Recession|series=Working Paper Series |doi=10.3386/w16775|url=http://www.nber.org/papers/w16775|doi-access=free}}</ref> McKay and [[Ricardo Reis|Reis]] (2016)<ref>{{Cite journal|last1=McKay|first1=Alisdair|last2=Reis|first2=Ricardo|date=June 2016|title=Optimal Automatic Stabilizers|series=Working Paper Series |doi=10.3386/w22359|s2cid=27044134|url=http://www.nber.org/papers/w22359|doi-access=free}}</ref> and [[Veronica Guerrieri|Guerrieri]] and Lorenzoni (2017).<ref>{{Cite journal|last1=Guerrieri|first1=Veronica|author1-link=Veronica Guerrieri|last2=Lorenzoni|first2=Guido|date=1 August 2017|title=Credit Crises, Precautionary Savings, and the Liquidity Trap|url=https://academic.oup.com/qje/article/132/3/1427/3071924|journal=The Quarterly Journal of Economics|language=en|volume=132|issue=3|pages=1427–1467|doi=10.1093/qje/qjx005|s2cid=7951907|issn=0033-5533}}</ref>

The name "HANK model" was coined by [[Greg Kaplan]], [[Benjamin Moll]] and [[Gianluca Violante]] in a 2018 paper<ref>{{Cite journal|last1=Kaplan|first1=Greg|last2=Moll|first2=Benjamin|last3=Violante|first3=Giovanni L.|date=March 2018|title=Monetary Policy According to HANK|journal=American Economic Review|language=en|volume=108|issue=3|pages=697–743|doi=10.1257/aer.20160042|s2cid=31927674|issn=0002-8282}}</ref> that additionally models households as accumulating two types of assets, one liquid and the other illiquid. This translates into rich heterogeneity in portfolio composition across households. In particular, the model fits empirical evidence by featuring a large share of households holding little liquid wealth: the 'hand-to-mouth' households. Consistent with empirical evidence,<ref>{{Cite web|title=Brookings Institution|url=https://www.brookings.edu/wp-content/uploads/2016/07/2014a_Kaplan.pdf}}</ref> about two-thirds of these households hold non-trivial amounts of illiquid wealth, despite holding little liquid wealth. These households are known as wealthy hand-to-mouth households, a term introduced in a 2014 study of fiscal stimulus policies by Kaplan and Violante.<ref>{{Cite journal|last1=Kaplan|first1=Greg|last2=Violante|first2=Giovanni L.|date=2014|title=A Model of the Consumption Response to Fiscal Stimulus Payments|journal=Econometrica|language=en|volume=82|issue=4|pages=1199–1239|doi=10.3982/ECTA10528|s2cid=15993790|issn=1468-0262|url=http://www.nber.org/papers/w17338.pdf}}</ref>

The existence of wealthy hand-to-mouth households in New Keynesian models matters for the effects of monetary policy, because the consumption behavior of those households is strongly sensitive to changes in disposable income, rather than variations in the interest rate (i.e. the price of future consumption relative to current consumption). The direct corollary is that monetary policy is mostly transmitted via general equilibrium effects that work through the household labor income, rather than through intertemporal substitution, which is the main transmission channel in Representative Agent New Keynesian (RANK) models.

There are two main implications for monetary policy. First, monetary policy interacts strongly with fiscal policy, because of the failure of [[Ricardian Equivalence]] due to the presence of hand-to-mouth households. In particular, changes in the interest rate shift the Government's budget constraint, and the fiscal response to this shift affects households' disposable income. Second, aggregate monetary shocks are not distributional neutral since they affect the return on capital, which affects households with different levels of wealth and assets differently.