Fiscal Policy in HANK Models: One Asset versus Two Assets

We compare four policy instruments--deficit-financed spending, tax cuts, progressive redistribution, and monetary easing--across three HANK specifications: a one-asset baseline, a two-asset model with conventional monetary policy, and an extended two-asset model with endogenous capital, Tobin's Q, and Quantitative Easing (QE) with an explicit central bank balance sheet.Introducing a second, illiquid asset produces a sharp output reversal in the fixed-capital two-asset economy: progressive redistribution moves from most expansionary to contractionary, while deficit spending becomes the dominant output tool. Endogenous capital partially rehabilitates progressive redistribution through the investment channel, but deficit spending remains the most expansionary instrument in both two-asset specifications. A decomposition of the progressive redistribution experiment into its spending and progressivity components confirms that the output reversal is driven entirely by the progressivity channel, which shifts from mildly expansionary in the one-asset economy to strongly contractionary in both two-asset economies. Under the income-based measure, progressive redistribution remains the most equalizing instrument in every specification, with progressivity alone generating pro-poor level gaps of 0.6 percent to 2.2 percent of steady-state output across all three economies. Finally, QE stimulates output relatively more than expansionary conventional monetary policy, but has limited distributional impact.