Poverty and monetary policy in HANK Models

This work introduces the effect of poverty in a heterogeneous agent model and also evaluates the impacts of monetary policy. Households have Stone-Geary preferences which means that they face a minimum consumption constraint: this approach allows poverty to be endogenously determined. We derive the IS and Phillips curves and demonstrate that the slope of these curves changes with poverty, so, the persistence of shocks is well explained by the dynamics of those curves: low-income economies exhibit steeper IS and Phillips curves than high-income economies. We observe that richer economies deal with more pronounced shocks, although poorer economies suffer especially with the persistence of those. For example: a negative shock generates higher inflation in rich countries than in poor countries, but the propagation of the shock remains for more periods in poor countries. Moreover, the welfare analyses indicate that commitment is preferable to discretion in most cases.