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Macroeconomics Seminar presented by Xavier Ragot (Science Po)

04 March 2020, 12:00 pm–2:00 pm

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Should monetary policy care about redistribution? Should fiscal policy care about inflation? Optimal monetary policy with heterogeneous agents (with François Le Grand and Alais Martin-Baillon)

Event Information

Open to

All

Organiser

Department of Economics – Department of Economics

Location

Rm 321, Drayton House
30 Gordon Street
London
WC1H 0AX
United Kingdom

Abstract:

We investigate the redistributive role of monetary policy in an heterogeneous agent framework, considering a realistic fiscal policy. We solve for both optimal monetary and fiscal policies in an economy with capital, nominal frictions and for various types of aggregate shocks (sometimes called HANK model). The role of monetary policy is shown to crucially depend on capital and labor taxes. Indeed, when simple linear taxes on capital and labor are available, we prove that there is strictly no redistributive role for monetary policy. This neutrality result provides a benchmark to assess the redistributive role for monetary policy when some fiscal tools are missing. Quantitatively, important deviations from price stability occurs when fiscal policy (both labor and capital tax) doesn't change optimally in the business cycle. In this weak form of fiscal dominance, public debt is slow moving and is affected by monetary policy. We provide analytical and numerical results thanks to an extensive use of the Lagrangian approach to derive optimal policies. This approach is well-suited for monetary policy with heterogeneous agents.

 

About the Speaker

Xavier Ragot

at Science Po

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