Macroeconomic Fluctuations with HANK & SAM: An Analytical Approach

New Keynesian models with unemployment and incomplete markets are rapidly becoming a new workhorse model in macroeconomics. Such models typically require heavy computational methods which may obscure intuition and overlook equilibria. We present a tractable version which can be characterized analytically. Our results highlight that ñdue the interaction between incomplete markets, sticky prices and endogenous unemployment risk ñproductivity shocks may have radically di§erent e§ects than in traditional NK models, that the Taylor principle may fail, and that pessimistic beliefs may be self-fulÖlling and move the economy into temporary episodes of low demand and high unemployment, as well as into a long-lasting ìunemployment trapî. At the Zero Lower Bound, the presence of endogenous unemployment risk can create ináation and overturn paradoxical properties of the model. We further study Önancial asset prices and show that non-negligible risk premia emerge.