New UK-HANK model quantifies household heterogeneity in monetary policy

The UK-HANK model, developed by Bank of England staff, provides a granular view of monetary policy transmission by incorporating realistic household income and wealth distributions.

It generates marginal propensities to consume consistent with UK evidence, allowing for a detailed decomposition of how interest rate changes affect the economy.

The model's versatility is demonstrated through several policy-relevant applications.

It reveals that mortgagors' consumption is most sensitive to house price changes across tenure groups.

A lower share of sterling invoicing in exports mildly weakens monetary transmission.

The study also finds that balanced-budget fiscal reaction functions strengthen monetary transmission.

Furthermore, shifts in household balance sheets over the past two decades have dampened the cumulative impact of interest rate changes on prices by around 25% over three years, while GDP effects remain similar due to offsetting dynamics across channels.

These findings offer crucial insights into the complex interplay of household behavior and macroeconomic policy.

Heterogeneous Agent New Keynesian (HANK) models augment the established New Keynesian framework by incorporating a realistic distribution of households over income and wealth.

This offers an advantage over traditional DSGE models by providing empirically consistent micro-foundations for household behaviour and replicating observed heterogeneity.

UK-HANK specifically captures a wide range of monetary policy effects through detailed modelling of the housing sector, international linkages, and fiscal policy.

Its distinctive treatment of secured borrowing against housing creates substantial negative financial wealth for some households, aligning the model's transmission channels closer to the prevailing narrative.

The model is carefully parameterised to capture key features of the UK economy over 1993–2023.