4.6 Article

Inequality, Business Cycles, and Monetary-Fiscal Policy

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Summary: 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.

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