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Optimal Fiscal-Monetary Policy with Redistribution

Author

Listed:
  • Thomas Sargent

    (New York University)

  • Mikhail Golosov

    (Princeton University)

  • David Evans

    (University of Oregon)

  • anmol bhandari

    (university of minnesota)

Abstract

We study business cycles in a heterogeneous agent model with incomplete markets and sticky nominal prices (a modified HANK model (Kaplan et al. (2016))). Optimal fiscal-monetary policy balances gains from “fiscal hedging” against benefits flowing from a countervailing new motive – “redistributional hedging”. A fictitious planner uses inflation to offset adverse shocks to the cross-section distribution of labor earnings. A calibration that imitates how US recessions reshape that cross-section distribution (as documented by Guve- nen et al. (2014)) indicates that substantial welfare benefits come from moving inflation in response to aggregate shocks.

Suggested Citation

  • Thomas Sargent & Mikhail Golosov & David Evans & anmol bhandari, 2017. "Optimal Fiscal-Monetary Policy with Redistribution," 2017 Meeting Papers 1245, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1245
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    References listed on IDEAS

    as
    1. Lustig, Hanno & Sleet, Christopher & Yeltekin, Sevin, 2008. "Fiscal hedging with nominal assets," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 710-727, May.
    2. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, vol. 4(4), pages 335-342, November.
    3. Siu, Henry E., 2004. "Optimal fiscal and monetary policy with sticky prices," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 575-607, April.
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    Cited by:

    1. Ivens, Annika, 2018. "Optimal fiscal policy under private debt deleveraging," Journal of Economic Dynamics and Control, Elsevier, vol. 97(C), pages 1-18.
    2. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas Sargent, 2019. "The Optimal Maturity of Government Debt," 2019 Meeting Papers 1011, Society for Economic Dynamics.

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