Optimal Fiscal-Monetary Policy with Redistribution

Thomas Sargent, Mikhail Golosov, David Evans and Anmol Bhandari
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David Evans: University of Oregon
Anmol Bhandari: university of minnesota

No 1245, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We study business cycles in a heterogeneous agent model with incomplete markets and sticky nominal prices (a modified HANK model (Kaplan et al. (2016))). Optimal fiscal-monetary policy balances gains from “fiscal hedging” against benefits flowing from a countervailing new motive – “redistributional hedging”. A fictitious planner uses inflation to offset adverse shocks to the cross-section distribution of labor earnings. A calibration that imitates how US recessions reshape that cross-section distribution (as documented by Guve- nen et al. (2014)) indicates that substantial welfare benefits come from moving inflation in response to aggregate shocks.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-mac
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