Inequality, Business Cycles, and Monetary-Fiscal Policy

83 Pages Posted: 18 Jun 2018 Last revised: 9 Jul 2023

See all articles by Anmol Bhandari

Anmol Bhandari

University of Minnesota - Minneapolis - Department of Economics

David Evans

University of Oregon - Department of Economics

Mikhail Golosov

Princeton University - Department of Economics

Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Date Written: June 2018

Abstract

We study optimal monetary and fiscal policy in a model with heterogeneous agents, incomplete markets, and nominal rigidities. We develop numerical techniques to approximate Ramsey plans and apply them to a calibrated economy to compute optimal responses of nominal interest rates and labor tax rates to aggregate shocks. Responses differ qualitatively from those in a representative agent economy and are an order of magnitude larger. Taylor rules poorly approximate the Ramsey optimal nominal interest rate. Conventional price stabilization motives are swamped by an across person insurance motive that arises from heterogeneity and incomplete markets.

Suggested Citation

Bhandari, Anmol and Evans, David and Golosov, Mikhail and Sargent, Thomas J., Inequality, Business Cycles, and Monetary-Fiscal Policy (June 2018). NBER Working Paper No. w24710, Available at SSRN: https://ssrn.com/abstract=3198012

Anmol Bhandari (Contact Author)

University of Minnesota - Minneapolis - Department of Economics ( email )

1925 Fourth Street South
Minneapolis, MN
United States

David Evans

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States

Mikhail Golosov

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ 08544-1021
United States

Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-3548 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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