Should Monetary Policy Care about Redistribution? Optimal Monetary and Fiscal Policy with Heterogeneous Agents

Research Question. Should monetary policy deviate from price stability to address redistributive concerns in an economy with heterogeneous agents? The paper jointly solves for optimal monetary and fiscal policy under commitment in a Heterogeneous Agent New Keynesian (HANK) environment with incomplete insurance markets for idiosyncratic risk, nominal frictions (Rotemberg price adjustment costs), and aggregate technology shocks.

Framework. The model is a Bewley-style incomplete-markets economy populated by a continuum of agents who differ in their idiosyncratic labor productivity histories. Agents save in two assets — nominal public debt and real capital shares — and face nominal borrowing constraints. Intermediate firms operate under monopolistic competition and face quadratic price adjustment costs. The government has up to five fiscal instruments: linear taxes on real capital income, on nominal asset income, and on labor income; lump-sum transfers; and one-period public nominal debt. Monetary policy controls the path of the nominal interest rate, and thereby inflation.

Alaïs Martin-Baillon | Macro Paper Warehouse

Should Monetary Policy Care about Redistribution? Optimal Monetary and Fiscal Policy with Heterogeneous Agents