NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Inequality, Business Cycles, and Monetary-Fiscal Policy

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

NBER Working Paper No. 24710
Issued in June 2018
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics, Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w24710

 
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