IDEAS home Printed from https://ideas.repec.org/a/wly/canjec/v51y2018i3p747-783.html
   My bibliography  Save this article

Monetary and fiscal policies in a heterogeneous‐agent economy

Author

Listed:
  • Hongfei Sun
  • Chenggang Zhou

Abstract

We study the effects of long‐run inflation and income taxation in an economy where households face uninsurable idiosyncratic risks. We construct a tractable competitive‐search framework that generates dispersion of prices, income and wealth. We analytically characterize the stationary equilibrium and the policy effects on individual choices. Quantitative analysis finds that monetary and fiscal policies have distinct effects on macro aggregates, such as output, savings and wealth, income and consumption inequalities. There is a hump‐shaped relationship between welfare and the respective policies. Overall, welfare is maximized by a deviation from the Friedman rule, paired with distortionary income taxation. Politiques fiscales et monétaires dans une économie où les agents sont hétérogènes. Les auteurs étudient les effets de l’inflation à long terme et de l’impôt sur le revenu dans une économie où les ménages font face à des risques idiosyncratiques non‐assurables. Ils construisent un cadre conceptuel concurrence‐recherche maniable qui génère la dispersion des prix, du revenu, et de la richesse. On caractérise analytiquement l’équilibre stationnaire et les effets des politiques sur les choix individuels. L’analyse quantitative révèle que les politiques monétaires et fiscales ont des effets distincts sur les agrégats macro‐économiques comme le produit et les épargnes, et sur les inégalités de richesse, des revenus et de la consommation. Il y a une relation en forme de bosse entre le bien‐être et les politiques respectives. Au total, le bien‐être est maximisé par une déviation de la règle de Friedman pairée avec la fiscalité sur le revenu discrétionnaire.

Suggested Citation

  • Hongfei Sun & Chenggang Zhou, 2018. "Monetary and fiscal policies in a heterogeneous‐agent economy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(3), pages 747-783, August.
    • Handle: RePEc:wly:canjec:v:51:y:2018:i:3:p:747-783
    DOI: 10.1111/caje.12337
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/caje.12337
    Download Restriction: no
    File URL: https://libkey.io/10.1111/caje.12337?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Gabriele Camera & Yili Chien, 2014. "Understanding the Distributional Impact of Long‐Run Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(6), pages 1137-1170, September.
    2. Wang, Liang, 2016. "Endogenous search, price dispersion, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 94-117.
    3. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
    4. Scott J. Dressler, 2011. "Money Holdings, Inflation, And Welfare In A Competitive Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(2), pages 407-423, May.
    5. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
    6. Akyol, Ahmet, 2004. "Optimal monetary policy in an economy with incomplete markets and idiosyncratic risk," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1245-1269, September.
    7. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, August.
    8. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    9. Boel, Paola & Camera, Gabriele, 2009. "Financial sophistication and the distribution of the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 968-978, October.
    10. Francisco M. Gonzalez & Shouyong Shi, 2010. "An Equilibrium Theory of Learning, Search, and Wages," Econometrica, Econometric Society, vol. 78(2), pages 509-537, March.
    11. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468-510.
    12. Jonathan Chiu & Miguel Molico, 2011. "Uncertainty, Inflation, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 487-512, October.
    13. Camera, Gabriele, 2000. "Money, Search, And Costly Matchmaking," Macroeconomic Dynamics, Cambridge University Press, vol. 4(3), pages 289-323, September.
    14. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
    15. Chiu, Jonathan & Molico, Miguel, 2010. "Liquidity, redistribution, and the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 428-438, May.
    16. Wen, Yi, 2015. "Money, liquidity and welfare," European Economic Review, Elsevier, vol. 76(C), pages 1-24.
    17. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    18. Erosa, Andres & Ventura, Gustavo, 2002. "On inflation as a regressive consumption tax," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 761-795, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jonathan Chiu & Miguel Molico, 2021. "Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 133-155, October.
    2. Jonathan Chiu & Miguel Molico, 2021. "Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 133-155, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jin, Gu & Zhu, Tao, 2022. "Heterogeneity, decentralized trade, and the long-run real effects of inflation," Journal of Economic Theory, Elsevier, vol. 201(C).
    2. Menzio, Guido & Shi, Shouyong & Sun, Hongfei, 2013. "A monetary theory with non-degenerate distributions," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2266-2312.
    3. Boel, Paola & Camera, Gabriele, 2009. "Financial sophistication and the distribution of the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 968-978, October.
    4. Stephen D. Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, vol. 92(May), pages 265-302.
    5. Paola Boel, 2017. "The Redistributive Effects of Inflation and the Shape of Money Demand," LWS Working papers 25, LIS Cross-National Data Center in Luxembourg.
    6. Dressler, Scott, 2016. "A long-run, short-run, and politico-economic analysis of the welfare costs of inflation," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 255-269.
    7. Aruoba, S. Boragan & Waller, Christopher J. & Wright, Randall, 2011. "Money and capital," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 98-116, March.
    8. Rocheteau, Guillaume & Weill, Pierre-Olivier & Wong, Russell, 2018. "A tractable model of monetary exchange with ex-post heterogeneity," Theoretical Economics, Econometric Society, vol. 13(3), September.
    9. Scott J. Dressler, 2011. "A Long-Run, Short-Run and Politico-Economic Analysis of the Welfare Costs of Inflation," Villanova School of Business Department of Economics and Statistics Working Paper Series 16, Villanova School of Business Department of Economics and Statistics.
    10. Kakar, Venoo, 2014. "On the Redistributional Effects of Long-Run Inflation in a Cash-in-Advance Economy," MPRA Paper 55687, University Library of Munich, Germany.
    11. Gabriele Camera & Yili Chien, 2014. "Understanding the Distributional Impact of Long‐Run Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(6), pages 1137-1170, September.
    12. Óscar Afonso, 2022. "Growth and wage effects of the monetary policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4058-4084, October.
    13. Aleksander Berentsen & Guido Menzio & Randall Wright, 2011. "Inflation and Unemployment in the Long Run," American Economic Review, American Economic Association, vol. 101(1), pages 371-398, February.
    14. Oscar Afonso, 2023. "Losers and losses of COVID-19: a directed technical change analysis with fiscal and monetary policies," Economic Change and Restructuring, Springer, vol. 56(3), pages 1777-1821, June.
    15. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    16. Boel, Paola, 2018. "The redistributive effects of inflation and the shape of money demand," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 208-219.
    17. Antinolfi, Gaetano & Azariadis, Costas & Bullard, James, 2016. "The Optimal Inflation Target In An Economy With Limited Enforcement," Macroeconomic Dynamics, Cambridge University Press, vol. 20(2), pages 582-600, March.
    18. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 261-282, October.
    19. Benjamín García, 2016. "Welfare Costs of Inflation and Imperfect Competition in a Monetary Search Model," Working Papers Central Bank of Chile 794, Central Bank of Chile.
    20. Gabriele Camera & Yili Chien, 2016. "Two Monetary Models with Alternating Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 1051-1064, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:canjec:v:51:y:2018:i:3:p:747-783. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1540-5982 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.