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Inequality, Business Cycles, and Monetary-Fiscal Policy

Author

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

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.

Suggested Citation

  • Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2018. "Inequality, Business Cycles, and Monetary-Fiscal Policy," NBER Working Papers 24710, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24710
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    References listed on IDEAS

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    Cited by:

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    2. Joel M. David & David Zeke, 2021. "Risk-Taking, Capital Allocation and Optimal Monetary Policy," Working Paper Series WP-2021-01, Federal Reserve Bank of Chicago.
    3. Asger Lau Andersen & Niels Johannesen & Mia Jørgensen & José-Luis Peydró, 2020. "Monetary policy and inequality," Economics Working Papers 1761, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2021.
    4. Mr. Niels-Jakob H Hansen & Alessandro Lin & Rui Mano, 2020. "Should Inequality Factor into Central Banks' Decisions?," IMF Working Papers 2020/196, International Monetary Fund.
    5. Ruediger Bachmann & Jinhui Bai & Minjoon Lee & Fudong Zhang, 2020. "The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 127-153, October.
    6. Chari, V.V. & Nicolini, Juan Pablo & Teles, Pedro, 2020. "Optimal capital taxation revisited," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 147-165.
    7. Bill Dupor & Marios Karabarbounis & Marianna Kudlyak & M Saif Mehkari, 2023. "Regional Consumption Responses and the Aggregate Fiscal Multiplier," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(6), pages 2982-3021.
    8. Grimaud, Alex, 2021. "Precautionary saving and un-anchored expectations," MPRA Paper 110651, University Library of Munich, Germany.
    9. Brand, Claus & Obstbaum, Meri & Coenen, Günter & Sondermann, David & Lydon, Reamonn & Ajevskis, Viktors & Hammermann, Felix & Angino, Siria & Hernborg, Nils & Basso, Henrique & Hertweck, Matthias & Bi, 2021. "Employment and the conduct of monetary policy in the euro area," Occasional Paper Series 275, European Central Bank.
    10. Ruediger Bachmann & Jinhui Bai & Minjoon Lee & Fudong Zhang, 2020. "The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 127-153, October.
    11. James B. Bullard & Riccardo DiCecio, 2019. "Optimal Monetary Policy for the Masses," Working Papers 2019-009, Federal Reserve Bank of St. Louis, revised 25 Jul 2023.
    12. Edouard Djeutem & Mario He & Abeer Reza & Yang Zhang, 2022. "Household Heterogeneity and the Performance of Monetary Policy Frameworks," Staff Working Papers 22-12, Bank of Canada.
    13. Greg Kaplan & Piotr Zoch, 2020. "Markups, Labor Market Inequality and the Nature of Work," Working Papers 2020-09, Becker Friedman Institute for Research In Economics.
    14. Beatriz González & Galo Nuño & Dominik Thaler & Silvia Albrizio, 2021. "Firm heterogeneity, capital misallocation and optimal monetary policy," Working Papers 2145, Banco de España.
    15. Selahattin Imrohoroglu, 2023. "Mpk," CIGS Working Paper Series 24-002E, The Canon Institute for Global Studies.
    16. Corina Boar & Virgiliu Midrigan, 2019. "Markups and Inequality," NBER Working Papers 25952, National Bureau of Economic Research, Inc.
    17. Serdar Birinci, 2019. "Spousal Labor Supply Response to Job Displacement and Implications for Optimal Transfers," Working Papers 2019-020, Federal Reserve Bank of St. Louis, revised 25 Sep 2021.
    18. Ma, Qingyin & Stachurski, John & Toda, Alexis Akira, 2020. "The income fluctuation problem and the evolution of wealth," Journal of Economic Theory, Elsevier, vol. 187(C).
    19. Michael Reiter, 2019. "Solving Heterogeneous Agent Models with Non-convex Optimization Problems: Linearization and Beyond %," 2019 Meeting Papers 1048, Society for Economic Dynamics.
    20. Bilbiie, Florin & Monacelli, Tommas & Perotti, Roberto, 2020. "Stabilization vs. Redistribution: the Optimal Monetary-Fiscal Mix," CEPR Discussion Papers 15199, C.E.P.R. Discussion Papers.
    21. Stone, Joe A. & Jacobs, David, 2020. "Presidential party affiliation and electoral cycles in the U.S. economy: Evidence from party changes in adjacent terms," Journal of Macroeconomics, Elsevier, vol. 64(C).
    22. Andrea Colciago & Anna Samarina & Jakob de Haan, 2019. "Central Bank Policies And Income And Wealth Inequality: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 33(4), pages 1199-1231, September.

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    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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