Inequality, Business Cycles, and Monetary-Fiscal Policy
Anmol Bhandari, David Evans, Mikhail Golosov, Thomas J. Sargent
Econometrica · 2021 · Volume 89 · Issue 6
Abstract
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.
Keywords
Sticky prices, heterogeneity, monetary policy, fiscal policy
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