Working Papers
Inequality, Labour Market Dynamics and the Policy Mix: Insights from a FLANK
Abstract : This paper develops a tractable heterogeneous-agent New Keynesian model with overlapping generations, labour-market frictions, and a participation margin under which households can permanently exit labour and asset markets. The interaction between wage bargaining and stochastic participation generates a structural labour wedge that enters the marginal cost and flattens the Phillips curve, distorting labour-market outcomes and weakening monetary transmission. A stylised fiscal transfer shock reduces inequality across regimes, but its aggregate effects hinge on the monetary stance and the persistence of redistribution. Dovish monetary policy consistently amplifies the macroeconomic and welfare gains from redistribution—even when inequality paths are identical—revealing a structural fiscal–monetary complementarity between accommodative policy and fiscal transfers. These findings are robust across calibrations and reflect the model’s endogenous propagation mechanisms rather than specific parameter choices.
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.