Working Papers
Inequality, Labour Market Dynamics and the Policy Mix: Insights from a FLANK
Abstract : TThe paper develops a tractable heterogeneous-agent New Keynesian model with overlapping generations, search-and-matching frictions, and a participation margin that allows permanent exit from both labour and asset markets. Households that exit become permanently inactive and rely on fiscal transfers to consume in each period. Wage bargaining and stochastic exit generate a structural labour wedge that enters marginal cost and weakens the mapping from the output gap to inflation. The analysis primarily focuses on a one-off, unanticipated, autocorrelated increase in transfers to inactive households, motivated by crisis-driven expansions in the social state, to assess whether inequality-reducing policies are compatible with the efficiency maximising objectives pursued by recent political leaders. The shock reduces cross-sectional consumption inequality on impact. Aggregate effects depend on the monetary stance and on shock persistence. Al Dovish policy consistently amplifies the macroeconomic and welfare gains from redistribution—even when inequality paths are identical—implying a structural fiscal–monetary complementarity between accommodative policy and expansionary, transfer-based fiscal policy. The results reflect endogenous propagation through the participation--SAM wedge rather than fine-tuned calibration.
Equity versus Efficiency: Optimal Monetary and Fiscal Policy in a HANK Economy (Joint work with T. Kirsanova and C. Leith).
Abstract : We analyze optimal monetary and fiscal policy in a tractable heterogeneous agent New Keynesian (HANK) economy where overlapping generations of households wish to save for retirement and precautionary reasons. Fiscal policy matters most. A Ramsey policy maker faces trade-offs between intra- and inter-generational equity and between equity and efficiency. Intergenerational equity requires the government to issue debt to facilitate saving for retirement, but this drives up interest rates and inhibits household borrowing to mitigate the impact of idiosyncratic shocks. Issuing debt also reduces efficiency since taxes are distortionary. These trade-offs are resolved in favor of equity over efficiency.
In preparation
Optimal Monetary policy in a HANK Economy with Government Debt: A Tale of Two Ricardian Consumers (Preliminary draft available upon request; New draft coming soon...)
Abstract : We study optimal monetary policy in a tractable HANK environment with meaningful supply of government bonds. The model admits both idiosyncratic and aggregate risk. We assume that there exists a consolidated monetary- fiscal authority. The monetary authority pursues optimal (Ramsey) monetary policy whilst the fiscal authority follows a simple tax rule. Our aim is to provide a clear distinction between the notions of discontinuous labour market participation (DLMP) and infrequent asset market participation (IAMP), which are typically intertwined in the literature. In a HANK- DLMP model, constrained household types have different marginal propensity to consume but are still able to use assets to smooth their inter- temporal consumption. As such, the long run equilibrium as well as the model's dynamics under optimal monetary policy are different from both the nested representative agent model and from the HANK- IAMP framework. We demonstrate that DLMP frictions are an important source of heterogeneity on their own merit and should not be overlooked. Finally, we find that the policy maker in our framework will not deviate from price stability in steady state (Woodford, 2003). This result is unaffected by the amount of outstanding government debt or the presence of direct redistribution. The model is calibrated for the US economy for the period 1985- 2021.