Inequality, Business Cycles, and Monetary-Fiscal Policy
Date
2019-04
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Abstract
We study optimal monetary and fiscal policy in a model with heterogeneous agents, incomplete markets, and nominal rigidities. We develop numerical techniques to approximate Ramsey plans and apply them to a calibrated economy to compute optimal responses of nominal interest rates and labor tax rates to aggregate shocks. Responses differ qualitatively from those in a representative agent economy and are an order of magnitude larger. Taylor rules poorly approximate the Ramsey optimal nominal interest rate. Conventional price stabilization motives are swamped by an across person insurance motive that arises from heterogeneity and incomplete markets.
Description
Keywords
Sticky prices, Heterogeneity, Business cycles, Monetary policy, Fiscal policy
Citation
This is a pre-print and has not been peer reviewed.