Optimal Macroeconomic Policies in a Heterogeneous World

James Bullard (), Aarti Singh () and Jacek Suda ()
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James Bullard: Purdue University
Aarti Singh: University of Sydney
Jacek Suda: Narodowy Bank Polski and SGH Warsaw School of Economics

IMF Economic Review, 2024, vol. 72, issue 3, No 3, 1041 pages

Abstract: Abstract We study a DSGE model with “massive” heterogeneity, enough to approach Gini coefficients for income, wealth, and consumption in the U.S. data. The economy features three aggregate shocks as well as both permanent and temporary idiosyncratic risk. We introduce policymakers that can mitigate these risks for households, and a welfare theorem outlines how the proposed policies imply an optimal allocation of resources. The proposed policies include achieving the Wicksellian natural real rate of interest, social insurance, and a set of taxes and transfers designed to reduce consumption inequality. We calibrate the model to U.S. data from 1995 to 2023 assuming the optimal set of policies and argue that the model fit is promising. This suggests that, broadly speaking, U.S. macroeconomic policy has in recent decades been close to optimal. Improvements beyond this set of policies requires design of responses to very large shocks, and we suggest some directions in which such a design may proceed.

JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41308-024-00261-y

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