Econometrica Vol. 89 No. 6 2021

Inequality, Business Cycles, and Monetary‐Fiscal Policy

Anmol Bhandari¹; David Evans²; Mikhail Golosov³; Thomas J. Sargent⁴

¹ Economics Department, University of Minnesota · ² Economics Department, University of Oregon · ³ Economics Department, University of Chicago · ⁴ Economics Department, New York University

Abstract

We study optimal monetary and fiscal policies in a New Keynesian model with heterogeneous agents, incomplete markets, and nominal rigidities. Our approach uses small‐noise expansions and Fréchet derivatives to approximate equilibria quickly and efficiently. Responses of optimal policies to aggregate shocks differ qualitatively from what they would be in a corresponding representative agent economy and are an order of magnitude larger. A motive to provide insurance that arises from heterogeneity and incomplete markets outweighs price stabilization motives.

DOI

10.3982/ecta16414

Volume

89

Issue

6

Pages

2559-2599

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓