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.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 2559-2599 |
| Number of pages | 41 |
| Journal | Econometrica |
| Volume | 89 |
| Issue number | 6 |
| DOIs | |
| State | Published - Nov 2021 |
Bibliographical note
Publisher Copyright:© 2021 The Econometric Society
Keywords
- Sticky prices
- fiscal policy
- heterogeneity
- monetary policy
