Forward guidance and fiscal rules in HANK

Abstract

I show that in a canonical HANK model, under a balanced budget fiscal rule, the effect of a nominal interest rate peg is much larger than in a representative agent (RA) model. By contrast, under a standard fiscal rule where tax revenue responds gradually to deviations of the debt-to-GDP ratio from steady-state and depends on economic activity, the effect of forward guidance is much weaker than in the RA model, and becomes linear in the length of the peg. This result is robust to allowing for countercyclical inequality and income risk, and carries over to a quantitative model with capital