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Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks

Author

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  • François Le Grand

    (EM - EMLyon Business School)

  • Xavier Ragot

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

We provide a theory of truncation for incomplete insurance-market economies with aggregate shocks, which is shown to be a consistent representation of standard incomplete-market economies. This representation allows deriving optimal policies with capital and aggregate shock. We apply this framework to an economy where the government can use capital and labor taxes, positive transfers and public debt to smooth aggregate shocks. The average capital tax is shown to be positive if and only if credit constraints are binding for some households. In a quantitative exercise, the capital tax appears to be more volatile than the labor tax and public debt is countercyclical and mean-reverting.

Suggested Citation

  • François Le Grand & Xavier Ragot, 2017. "Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks," SciencePo Working papers hal-03458683, HAL.
    • Handle: RePEc:hal:wpspec:hal-03458683
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03458683
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    Cited by:

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    2. Le Grand, François & Ragot, Xavier, 2021. "Sovereign default and liquidity: The case for a world safe asset," Journal of International Economics, Elsevier, vol. 131(C).
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    4. repec:hal:spmain:info:hdl:2441/3jhmd4ib388m99gnolvi8klga2 is not listed on IDEAS
    5. YiLi Chien & Yi Wen, 2022. "Optimal Ramsey Taxation in Heterogeneous Agent Economies with Quasi-Linear Preferences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 124-160, October.
    6. François Le Grand & Xavier Ragot, 2022. "Managing Inequality Over Business Cycles: Optimal Policies With Heterogeneous Agents And Aggregate Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 511-540, February.
    7. Brand, Claus & Obstbaum, Meri & Coenen, Günter & Sondermann, David & Lydon, Reamonn & Ajevskis, Viktors & Hammermann, Felix & Angino, Siria & Hernborg, Nils & Basso, Henrique & Hertweck, Matthias & Bi, 2021. "Employment and the conduct of monetary policy in the euro area," Occasional Paper Series 275, European Central Bank.
    8. Boris Chafwehé & François Courtoy, 2021. "Optimal Taxes and Transfers with Household Heterogeneity," LIDAM Discussion Papers IRES 2021009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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    11. Cui, Wei & Sterk, Vincent, 2021. "Quantitative easing with heterogeneous agents," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 68-90.
    12. Yikai Wang & Hans Holter & Marcus Hagedorn, 2015. "The Optimum Quantity of Capital and Debt," 2015 Meeting Papers 1220, Society for Economic Dynamics.
    13. xavier Ragot & Francois Le Grand, 2018. "Sovereign Default and Liquidity: The Case for a World Safe," 2018 Meeting Papers 889, Society for Economic Dynamics.
    14. repec:spo:wpmain:info:hdl:2441/3jhmd4ib388m99gnolvi8klga2 is not listed on IDEAS
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    16. Clemens, Marius & Eydam, Ulrich & Heinemann, Maik, 2023. "Inequality over the business cycle: the role of distributive shocks," Macroeconomic Dynamics, Cambridge University Press, vol. 27(3), pages 571-600, April.

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    More about this item

    Keywords

    Incomplete markets; Optimal policy; Public debt;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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