Monetary Policy and Redistribution: A Look Under the Hatch with Tank

We provide an under-the-hatch look at the mechanisms at work in two-agent new Keynesian (TANK) models. A distinctive feature of our analysis is novel closed-form solutions for general Taylor-type monetary-policy rules. Our analysis of TANK models informs the quantitative heterogeneous-agent new Keynesian literature about potential mechanisms at play when evaluating the effects of monetary policy and fiscal redistribution between asset-market participants and non-participants. We find that, in conventional times, forward guidance is less effective at stimulating today's economy when asset-market participation is low. Additionally, future monetary-policy shocks may work mostly through direct channels even though contemporaneous shocks work largely through indirect channels. Finally, both consumption and income inequality in the model are fully determined by markups. Introducing capital adjustment costs overturns this result and leads to consumption inequality being more countercyclical than income inequality, as is in the data.