Equity versus Efficiency: Optimal Monetary and Fiscal Policy in a HANK Economy

Vasileios Karaferis, Tatiana Kirsanova and Campbell Leith

Working Papers from Business School - Economics, University of Glasgow

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.

Keywords: Heterogeneous Agents Models; Monetary Policy; Fiscal Policy; Inequality (search for similar items in EconPapers)
JEL-codes: E21 E30 E61 E62 E63 (search for similar items in EconPapers)
Date: 2024-10
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2024_11

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