Active vs. passive policy and the trade-off between output and inflation in HANK

When fiscal policy is active and monetary policy is passive in a heterogeneous agent New Keynesian (HANK) model, deficit-financed transfers to low-asset households lead to similar cumulative inflation but greater increases in real output than transfers to wealthier households. I use the inverse of the “Phillips multiplier”, the price level sacrifice ratio, to quantify this dynamic. Household heterogeneity and targeted policy change the timing of output gaps, making this consistent with the Phillips Curve and rendering conventional sacrifice ratio intuition misleading for assessing the inflation/output trade-off between policies. • Targeted active fiscal transfers raise the price level as much as untargeted transfers. • Despite this, targeted active transfers generate more real GDP. • The cumulative sacrifice ratio of targeted transfers is much higher than that of untargeted transfers.