Inequality, Labour Market Dynamics and the Policy Mix: Insights from a FLANK

Vasileios Karaferis

No 319, Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: This paper investigates whether redistributive fiscal policy can be reconciled with macroeconomic efficiency in a heterogeneous agent economy featuring labour market frictions and monetary policy trade-offs. The paper develops a Finitely-Lived Agent New Keynesian (FLANK) model with search-and-matching frictions and a novel participation margin, where households face a constant probability of permanent exclusion from both labour and financial markets. This structure generates persistent inter-generational and cross-sectional inequality and breaks the Ricardian equivalence through finite lifespans and realistic levels of government debt. The model is used to examine the transitional dynamics following a stylized fiscal expansion in the form of transfers to inactive households. The findings suggest that a dovish monetary stance—characterized by a more muted response to inflation—consistently improves labour market outcomes and mitigates inefficiencies, even when fiscal interventions fail to stimulate aggregate demand. These results imply that accommodative monetary policy can enhance the effectiveness of redistribution in heterogeneous-agent environments.

Keywords: Heterogeneous Agents; Monetary Policy; Fiscal Policy; Inequality; Redistribution; Labour Market Frictions (search for similar items in EconPapers)
JEL-codes: D63 D91 E21 E24 E52 E62 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2025-04
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.econ.ed.ac.uk/papers/id319_esedps.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:319

Access Statistics for this paper

More papers in Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh 31 Buccleuch Place, EH8 9JT, Edinburgh. Contact information at EDIRC.
Bibliographic data for series maintained by Research Office ().