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Monetary and fiscal policies in a heterogeneous-agent economy

Author

Listed:
  • Hongfei Sun
  • Chenggang Zhou

Abstract

We study the effects of long-run inflation and income taxation in an economy where households face uninsurable idiosyncratic risks. We construct a tractable competitive-search framework that generates dispersion of prices, income and wealth. We analytically characterize the stationary equilibrium and the policy effects on individual choices. Quantitative analysis finds that monetary and fiscal policies have distinct effects on macro aggregates, such as output, savings and wealth, income and consumption inequalities. There is a hump-shaped relationship between welfare and the respective policies. Overall, welfare is maximized by a deviation from the Friedman rule, paired with distortionary income taxation.

Suggested Citation

  • Hongfei Sun & Chenggang Zhou, 2018. "Monetary and fiscal policies in a heterogeneous-agent economy," Canadian Journal of Economics, Canadian Economics Association, vol. 51(3), pages 747-783, August.
    • Handle: RePEc:cje:issued:v:51:y:2018:i:3:p:747-783
    DOI: 10.1111/caje.12337
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    Cited by:

    1. Jonathan Chiu & Miguel Molico, 2021. "Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 133-155, October.
    2. Beverly Lapham & Ayman Mnasri, 2019. "Exchange Rate Pass-Through: A Competitive Search Approach," Working Paper 1418, Economics Department, Queen's University.
    3. Ayman Mnasri & Beverly Lapham, 2023. "A competitive search approach to exchange rate pass-through," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(1), pages 153-201, July.
    4. Jonathan Chiu & Miguel Molico, 2021. "Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 133-155, October.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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