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A. Grimaud:
"Precautionary saving and un-anchored expectations";
Bericht für ECON WPS - Working Papers in Economic Theory and Policy; Berichts-Nr. 8, 2021; 59 S.

This paper investigates monetary policy in a heterogeneous agent new Keynesian
(HANK) model where agents face idiosyncratic income risk and use adaptive learning
in order to form their expectations. Households experience different histories and
observe different idiosyncratic variables. This gives rise to idiosyncratic learning processes,
which naturally implies the existence of heterogeneous expectations. In HANK
models, supply shocks generate precautionary saving. The learning setup amplifies this
effect and can result in long-lasting disinflationary traps. Dovish Taylor rules focused
on closing the output gap dampen the learning effects. Price level targeting improves
the inflation and output stabilization trade-off by better anchoring expectations.

Adaptive learning, precautionary saving, restricted perception equilibrium, heterogeneous expectations, heterogeneous agent.

https://publik.tuwien.ac.at/files/publik_298924.pdf