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Inequality, Business Cycles, and Monetary‐Fiscal Policy
Author(s) -
Bhandari Anmol,
Evans David,
Golosov Mikhail,
Sargent Thomas J.
Publication year - 2021
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta16414
Subject(s) - economics , incomplete markets , monetary policy , fiscal policy , business cycle , new keynesian economics , order (exchange) , monetary economics , inequality , aggregate demand , stabilization policy , dynamic stochastic general equilibrium , keynesian economics , macroeconomics , microeconomics , finance , mathematical analysis , mathematics
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.