Working Papers
Inequality, Labour Market Dynamics and the Policy Mix: Insights from a FLANK (Submitted)
Abstract : In the post-pandemic era, high public debt and fears of recession have pushed political leaders to pursue efficiency objectives over equity concerns. The paper asks when redistribution can be reconciled with efficiency-maximising objectives and how the monetary stance shapes that trade-off. I develop a tractable heterogeneous-agent New Keynesian model with overlapping generations, search-and-matching frictions, and a participation margin due to stochastic transition to inactivity. Inactive households permanently exit labour and asset markets and consume only out of transfers. Nash bargaining generates a wage–participation wedge in the marginal cost, and stochastic exit makes this wedge quantitatively dominant, weakening the mapping from the output gap to inflation. Motivated by the evidence on crisis-driven transfer spikes, the analysis abstracts from aggregate risk and focuses on the perfect-foresight equilibrium path following a one-time, unanticipated and autocorrelated increase in transfers to inactive households. The shock lowers cross-sectional consumption inequality on impact. However, aggregate and welfare effects depend on the monetary stance and on shock persistence. A dovish stance delivers higher paths for all aggregate variables as well as higher social welfare even when inequality paths are identical across regimes, implying a structural fiscal–monetary complementarity. The results arise from endogenous mechanism rather than fine-tuned calibration and are robust across parameterisations.
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.