Journal
ECONOMETRICA
Volume 89, Issue 6, Pages 2559-2599Publisher
WILEY
DOI: 10.3982/ECTA16414
Keywords
Sticky prices; heterogeneity; monetary policy; fiscal policy
Categories
Funding
- NSF [36354]
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In this study, optimal monetary and fiscal policies in a New Keynesian model with heterogeneous agents, incomplete markets, and nominal rigidities were analyzed. The approach utilized small-noise expansions and Frechet derivatives to quickly and efficiently approximate equilibria. The study found that responses of optimal policies to aggregate shocks were qualitatively different and significantly larger than in a representative agent economy, with insurance motives outweighing price stabilization motives due to heterogeneity and incomplete markets.
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 Frechet 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.
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