INEQUALITY, BUSINESS CYCLES, AND MONETARY-FISCAL POLICY

We study optimal monetary and fiscal policies in a New Keynesian model with heterogeneous agents, incomplete markets, and nominal rigidities. Our approach uses small-noise expansions and Fréchet derivatives to approximate equilibria quickly and efficiently. Responses of optimal policies to aggregate...

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Bibliographic Details
Published in:Econometrica 2021-11, Vol.89 (6), p.2559-2599
Main Authors: Bhandari, Anmol, Evans, David, Golosov, Mikhail, Sargent, Thomas J.
Format: Article
Language:English
Subjects:
Business cycles
Economic theory
Fiscal policy
heterogeneity
Inequality
Insurance
Markets
monetary policy
Noise
Price stabilization
Sticky prices
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Summary:We study optimal monetary and fiscal policies in a New Keynesian model with heterogeneous agents, incomplete markets, and nominal rigidities. Our approach uses small-noise expansions and Fréchet derivatives to approximate equilibria quickly and efficiently. Responses of optimal policies to aggregate shocks differ qualitatively from what they would be in a corresponding representative agent economy and are an order of magnitude larger. A motive to provide insurance that arises from heterogeneity and incomplete markets outweighs price stabilization motives.
ISSN:0012-9682
1468-0262
DOI:10.3982/ECTA16414