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Optimal Fiscal-Monetary Policy with Redistribution

Author

Listed:
  • Thomas Sargent

    (New York University)

  • Mikhail Golosov

    (Princeton University)

  • David Evans

    (University of Oregon)

  • anmol bhandari

    (university of minnesota)

Abstract

We study business cycles in a heterogeneous agent model with incomplete markets and sticky nominal prices (a modified HANK model (Kaplan et al. (2016))). Optimal fiscal-monetary policy balances gains from “fiscal hedging” against benefits flowing from a countervailing new motive – “redistributional hedging”. A fictitious planner uses inflation to offset adverse shocks to the cross-section distribution of labor earnings. A calibration that imitates how US recessions reshape that cross-section distribution (as documented by Guve- nen et al. (2014)) indicates that substantial welfare benefits come from moving inflation in response to aggregate shocks.

Suggested Citation

  • Thomas Sargent & Mikhail Golosov & David Evans & anmol bhandari, 2017. "Optimal Fiscal-Monetary Policy with Redistribution," 2017 Meeting Papers 1245, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1245
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    References listed on IDEAS

    as
    1. Hamish Low & Costas Meghir & Luigi Pistaferri, 2010. "Wage Risk and Employment Risk over the Life Cycle," American Economic Review, American Economic Association, vol. 100(4), pages 1432-1467, September.
    2. Lustig, Hanno & Sleet, Christopher & Yeltekin, Sevin, 2008. "Fiscal hedging with nominal assets," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 710-727, May.
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    4. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March.
    5. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2001. "How Important Are Idiosyncratic Shocks? Evidence from Labor Supply," American Economic Review, American Economic Association, vol. 91(2), pages 413-417, May.
    6. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    7. Siu, Henry E., 2004. "Optimal fiscal and monetary policy with sticky prices," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 575-607, April.
    8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Citations

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    Cited by:

    1. Ivens, Annika, 2018. "Optimal fiscal policy under private debt deleveraging," Journal of Economic Dynamics and Control, Elsevier, vol. 97(C), pages 1-18.
    2. Florin Bilbiie & Xavier Ragot, 2021. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 71-95, July.
    3. Eunseong Ma, 2023. "Monetary Policy And Inequality: How Does One Affect The Other?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 691-725, May.
    4. repec:hal:spmain:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    5. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas Sargent, 2019. "The Optimal Maturity of Government Debt," 2019 Meeting Papers 1011, Society for Economic Dynamics.
    6. José Alves, 2021. "The Sinful Side of Taxation: Is it Possible to Satisfy the Government Hunger for Revenues While Promoting Economic Growth?," Hacienda Pública Española / Review of Public Economics, IEF, vol. 237(2), pages 85-109, June.
    7. Sergeyev, Dmitriy & Mehrotra, Neil, 2020. "Debt Sustainability in a Low Interest Rate World," CEPR Discussion Papers 15282, C.E.P.R. Discussion Papers.
    8. Nils Mattis Gornemann, 2018. "HANK meets Ramsey: Optimal Coordination of Monetary and Labor Market Policies," 2018 Meeting Papers 1252, Society for Economic Dynamics.
    9. Bilbiie, Florin O., 2020. "The New Keynesian cross," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 90-108.
    10. repec:hal:wpspec:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS

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