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Inequality, Business Cycles, and Monetary‐Fiscal Policy

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  • Anmol Bhandari
  • David Evans
  • Mikhail Golosov
  • Thomas J. Sargent

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.

Suggested Citation

  • Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2021. "Inequality, Business Cycles, and Monetary‐Fiscal Policy," Econometrica, Econometric Society, vol. 89(6), pages 2559-2599, November.
    • Handle: RePEc:wly:emetrp:v:89:y:2021:i:6:p:2559-2599
    DOI: 10.3982/ECTA16414
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    References listed on IDEAS

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    4. Jolan Mohimont & Maite de Sola Perea & Marie-Denise Zachary, 2022. "Softening the blow: Job retention schemes in the pandemic," Working Paper Research 414, National Bank of Belgium.

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