Monetary and Fiscal Policies in a Heterogeneous-Agent Economy

37 Pages Posted: 25 Jan 2012

Date Written: January 24, 2012

Abstract

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.

Keywords: Competitive Search, Distributional Effect, Monetary and Fiscal Policies

JEL Classification: E0, E4, E5, E6, H2, H3

Suggested Citation

Sun, Hongfei, Monetary and Fiscal Policies in a Heterogeneous-Agent Economy (January 24, 2012). Available at SSRN: https://ssrn.com/abstract=1991485 or http://dx.doi.org/10.2139/ssrn.1991485

Hongfei Sun (Contact Author)

Queen's University ( email )

94 University Avenue
Kingston, Ontario K7L 3N6
Canada
1 613-533-2267 (Phone)
1 613-533-6668 (Fax)

HOME PAGE: http://sites.google.com/view/ahsun/