Xavier Ragot (Sciences Po, CNRS, OFCE) - Should monetary policy care about redistribution? Optimal fiscal and monetary policy with heterogeneous agents

Co-authors: François Le Grand (Emlyon Business School and ETH) and Alaïs Martin-Baillon (Sciences Po)

We derive optimal monetary and fiscal policies in a heterogeneous-agent economy with nominal frictions and aggregate shocks, and allowing for a rich set of fiscal tools. We first theoretically show that when linear taxes on capital and labor are available, there is no redistributive role for monetary policy: monetary policy solely implements price stability. Second, when fiscal tools are incomplete, we find that optimal deviation from price stability is quantitatively very small when the economy is running for a long time, i.e. in a timeless perspective. Redistribution is then mostly a matter of fiscal policy. When fiscal tools are missing, there can be a significant though temporary deviation from price stability when we consider a time-0 problem where the planner is not constrained by past commitment. We provide analytical results using an extended Lagrangian approach applied to incomplete market models. Quantitative results are derived thanks to a truncated representation of incomplete-market models, which provides a relevant tractable environment.


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