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Equity versus Efficiency: Optimal Monetary and Fiscal Policy in a HANK Economy

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  • Vasileios Karaferis
  • Tatiana Kirsanova
  • Campbell Leith

Abstract

We analyze optimal monetary and fiscal policy in a tractable heterogeneous agent New Keynesian (HANK) economy where overlapping generations of households wish to save for retirement and precautionary reasons. Fiscal policy matters most. A Ramsey policy maker faces trade-offs between intra- and inter-generational equity and between equity and efficiency. Intergenerational equity requires the government to issue debt to facilitate saving for retirement, but this drives up interest rates and inhibits household borrowing to mitigate the impact of idiosyncratic shocks. Issuing debt also reduces efficiency since taxes are distortionary. These trade-offs are resolved in favor of equity over efficiency.

Suggested Citation

  • Vasileios Karaferis & Tatiana Kirsanova & Campbell Leith, 2024. "Equity versus Efficiency: Optimal Monetary and Fiscal Policy in a HANK Economy," Working Papers 2024_11, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2024_11
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    References listed on IDEAS

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    Cited by:

    1. Vasileios Karaferis, 2025. "Inequality, Labour Market Dynamics and the Policy Mix: Insights from a FLANK," Edinburgh School of Economics Discussion Paper Series 319, Edinburgh School of Economics, University of Edinburgh.

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    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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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