Implications of Fiscal-Monetary Interaction from HANK Models
I describe nine implications of the interconnectedness of fiscal and monetary policy that surface in Heterogeneous Agent New Keynesian (HANK) models. Not all are unique to HANK models. (i) Long run fiscal changes force monetary adjustments. (ii) Sustainable permanent deficits are feasible. (iii) Monetary policy leaves fiscal footprints, even with passive fiscal policy. (iv) Fewer controversies around active fiscal policy. (v) Equilibria are unique under a wider class of fiscal and monetary rules. (vi) With short-term debt, raising nominal rates without a fiscal contraction raises inflation. (vii) Unfunded fiscal stimulus is more inflationary. (viii) Even fully funded fiscal stimulus is inflationary. (ix) Fiscal transfers can substitute for monetary policy in the aggregate.
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