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Optimal Macroeconomic Policies in a Heterogeneous World

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Abstract

We study a DSGE model with “massive” heterogeneity, enough to approach Gini coefficients for income, wealth, and consumption in the U.S. data. The economy features three aggregate shocks as well as both permanent and temporary idiosyncratic risk. We introduce policymakers that can mitigate these risks for households, and a welfare theorem outlines how the proposed policies imply an optimal allocation of resources. The proposed policies include achieving the Wicksellian natural real rate of interest, social insurance, and a set of taxes and transfers designed to reduce consumption inequality. We calibrate the model to U.S. data from 1995 to 2023 assuming the optimal set of policies and argue that the model fit is promising. This suggests that, broadly speaking, U.S. macroeconomic policy has in recent decades been close to optimal. Improvements beyond this set of policies requires design of responses to very large shocks, and we suggest some directions in which such a design may proceed.
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  • James B. Bullard & Riccardo DiCecio & Aarti Singh & Jacek Suda, 2023. "Optimal Macroeconomic Policies in a Heterogeneous World," Speech 96444, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlps:96444
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    Cited by:

    1. Bence Bardóczy, 2024. "HANK Comes of Age: Monetary Policy with Heterogeneous Overlapping Generations," Finance and Economics Discussion Series 2024-052r1, Board of Governors of the Federal Reserve System (U.S.), revised 19 Dec 2025.
    2. Bullard, James, 2025. "Social learning for the masses," Journal of Economic Dynamics and Control, Elsevier, vol. 172(C).

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    Keywords

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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