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Managing Inequality over the Business Cycles: Optimal Policies with Heterogeneous Agents and Aggregate Shocks

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  • xavier Ragot

    (SciencesPo)

Abstract

We present a projection theory on the space of idiosyncratic histories for heterogeneous-agents models. This allows solving for optimal Ramsey policies in heterogeneous-agent models with aggregate shocks, using a Lagrangian approach. In addition, it allows improving current simulation methods using perturbation techniques, by using more steady-state information. We apply this to study the optimal level distorting tax on labor and unemployment insurance over the business cycle in a production economy. In the quantitative exercise, the average optimal replacement rate is 10% higher than the one implies by a sufficient-statistics approach, due to saving distortions. Moreover, the optimal replacement rate is countercyclical.

Suggested Citation

  • xavier Ragot, 2019. "Managing Inequality over the Business Cycles: Optimal Policies with Heterogeneous Agents and Aggregate Shocks," 2019 Meeting Papers 1090, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1090
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    5. Mark Aguiar & Manuel Amador & Cristina Arellano, 2021. "Micro Risks and Pareto Improving Policies with Low Interest Rates," Staff Report 625, Federal Reserve Bank of Minneapolis.
    6. François Le Grand & Xavier Ragot, 2023. "Should we increase or decrease public debt? Optimal fiscal policy with heterogeneous agents," Working Papers halshs-03922359, HAL.
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    8. François Le Grand & Xavier Ragot, 2022. "Refining the truncation method to solve heterogeneous-agent models," Post-Print hal-04384033, HAL.
    9. Grimaud, Alex, 2021. "Precautionary saving and un-anchored expectations," MPRA Paper 110651, University Library of Munich, Germany.
    10. Grimaud, Alex, 2021. "Precautionary saving and un-anchored expectations," MPRA Paper 108931, University Library of Munich, Germany.
    11. Beatriz González & Galo Nuño & Dominik Thaler & Silvia Albrizio, 2021. "Firm heterogeneity, capital misallocation and optimal monetary policy," Working Papers 2145, Banco de España.
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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