Monetary and Fiscal Policies in a Heterogeneous-Agent Economy
I study the effects of long-run inflation and income taxation in an economy where households face uninsurable idiosyncratic risks. I construct a tractable competitive search framework that generates dispersion of prices, income and wealth. I analytically characterize the stationary equilibrium and the policy effects on individual choices. Quantitative analysis finds that monetary and fiscal policies have distinctive effects on macro aggregates, such as output, savings, wealth dispersion, income and consumption inequalities. There can be a hump-shape relationship between welfare and the respective policies. Overall, welfare can be maximized by a deviation from the Friedman rule, paired with distortionary income taxation.
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