Optimal monetary and fiscal policy are jointly analyzed in a heterogeneous two-agents New Keynesian environment, where fiscal policy is modeled in the form of lump-sum transfers set by the government. The main result is that transfer policy does not serve as a substitute for forward guidance - as it entails consumption dispersion costs - and does not affect its optimal duration. Transfers indeed influence the length of stay at the zero lower bound through two offsetting channels: a shortening channel works through an initial increase in transfers that mitigates the recession (reducing the need for forward guidance), and a lengthening channel works through a later transfer cut that curbs the undesired expansion (making forward guidance desirable for a longer horizon). Imposing a homogeneous transfer policy across agents does not change the stabilization outcome or the effect on the duration of forward guidance, nor does so allowing for cyclical income differences.
This paper analyzes the monetary policy trade-off between curbing inflation and keeping moderate debt costs for borrowers in a heterogeneous agent New Keynesian open economy model subject to a foreign energy price shock. Raising the interest rate succeeds in dampening inflation through real exchange rate appreciation, but increases borrowing costs, creating an adverse distributional outcome. The trade-off can be resolved by adopting a milder interest rate policy during the crisis in exchange for a prolonged contraction beyond the energy shock time span. This interest rate smoothing approach allows to still experience a real appreciation today, while spreading the impact on debt costs more evenly over time. This policy counterfactual is analyzed in a quantitative model of the UK economy under the 2022-2023 energy price shock, where the loss of consumers’ purchasing power and the vulnerability of mortgage costs to higher policy rates have been elements of paramount empirical relevance.
This paper proposes a new method to solve for optimal policy in heterogeneous agents New Keynesian models (HANK). It builds on the discretize-then-optimize method by Nuño, Gonzalez, Thaler, and Albrizio (2023), and reduces its computational complexity by leveraging the linearity of the first order conditions of the Ramsey planner in terms of the co-states of the problem. An application is carried out in the case of optimal management of energy shocks in HANK.