Inequality, Business Cycles, and Monetary-Fiscal Policy

Anmol Bhandari, David Evans, Mikhail Golosov, Thomas J. Sargent

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We study optimal monetary and fiscal policies in a New Keynesian model with heterogeneous agents, incomplete markets, and nominal rigidities. Our approach uses small-noise expansions and Fréchet derivatives to approximate equilibria quickly and efficiently. Responses of optimal policies to aggregate shocks differ qualitatively from what they would be in a corresponding representative agent economy and are an order of magnitude larger. A motive to provide insurance that arises from heterogeneity and incomplete markets outweighs price stabilization motives.

Original languageEnglish (US)
Pages (from-to)2559-2599
Number of pages41
JournalEconometrica
Volume89
Issue number6
DOIs
StatePublished - Nov 2021

Bibliographical note

Publisher Copyright:
© 2021 The Econometric Society

Keywords

  • fiscal policy
  • heterogeneity
  • monetary policy
  • Sticky prices

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