RDP 2025-04: HANK and the Transmission of Shocks to Demand and Supply 7. Conclusion

In this paper, we've begun to investigate incorporating heterogeneity into a macroeconomic model of the Australian economy. Specifically, we've explored how a model with uninsurable individual productivity shocks will result in households in the model having different optimal decisions, resulting in a distribution of these households over wealth and income. We've then examined how these differences impact how aggregate economic shocks transmit through the economy.

This work comes at a time of heightened interest both in how heterogeneity impacts shock transmission to the economy, and how they impact distributional outcomes. In terms of shock transmission, differing agent behaviour in one part of the distribution could offset that in another, while agents at constraints could amplify the effects. In terms of distributional outcomes, some agents may be made worse off by a given shock depending on their history of asset accumulation whereas others might be made better off.

The specific exercise in this paper was to construct a HANK model – featuring heterogeneous agents differing in income and wealth, price rigidities and a role for monetary policy – calibrated to the income dynamics of the Australian economy. We found that in such a model, real effects of monetary policy shocks, labour supply shocks, and mark-up shocks tend to be dampened due to high household insurance through a large stock of liquid assets. We also found that these shocks resulted in a variation of household reactions across the distribution, while the distributional impacts of mark-up shocks were relatively subdued.

Notably, the results with regards to a demand shock in this paper are at odds with the wider literature, which typically finds amplification of shocks with heterogeneous agents. While this work is an important first step towards understanding how the range of income and wealth outcomes in the Australian economy can impact the transmission of economic shocks, it also highlights the importance of further work to understand how incorporating a broader range of assets into the model would affect this transmission. These issues, among others, highlight the potential value of further structural modelling of the Australian economy.