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  4. Preliminary Program
  5. Monetary and Fiscal Policy
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Monetary and Fiscal Policy

Paper Session

Sunday, Jan. 3, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: Econometric Society
  • Chair: Patrick Kehoe, Stanford University

On the Dynamic Effects of Monetary Policy with Heterogeneous Agents

Patrick Kehoe
,
Stanford University
Virgiliu Midrigan
,
New York University
Elena Pastorino
,
Stanford University
Sergio Salgado
,
University of Pennsylvania

Abstract

Until recently, most theoretical and empirical work on monetary policy has focused on the responses of aggregate variables to monetary policy shocks. A burgeoning literature has argued instead that understanding the distributional impacts of these shocks across different groups of households, as distinguished by the severity of their financial constraints, is critical to assessing the implications of monetary policy. To date, though, this literature lacks evidence both on how different groups of households respond to monetary policy shocks and on the ability of models that allow for heterogeneous agents to reproduce the patterns of responses observed in the data. The goal of this paper is to supply this missing evidence. Specifically, using microeconomic data from the Consumption Expenditure Survey, we first provide new evidence on the response of consumption to monetary policy shocks, both in the aggregate and within distinct groups of households as defined by their level of consumption, income, liquid (financial and non-financial) and illiquid wealth, and overall net worth. A comprehensive VAR analysis of these data shows that although a monetary policy tightening leads to a decline in consumption for all households, the response of financially-constrained households is larger in magnitude and faster in timing than the response of non-financially-constrained households. We then review the ability of prominent existing models to account for these patterns, and conclude by proposing a new model that is consistent with the features of the data that we document.

Optimal Monetary Policy According to HANK

Sushant Acharya
,
Federal Reserve Bank of New York
Edouard Challe
,
Ecole Polytechnique (CREST)
Keshav Dogra
,
Federal Reserve Bank of New York

Abstract

We study optimal monetary policy in a heterogeneous agent new Keynesian economy. A utilitarian planner seeks to reduce consumption inequality, in addition to stabilizing output gaps and inflation. The planner does so both by reducing income risk faced by households, and by reducing the pass-through from income to consumption risk, trading off the benefits of lower inequality against productive inefficiency and higher inflation. When income risk is countercyclical, policy curtails the fall in output in recessions to mitigate the increase in inequality. We uncover a new form of time inconsistency of the Ramsey plan—the temptation to exploit households' unhedged interest rate exposure to lower inequality.

Optimal Monetary Policy in Production Networks

Jennifer La'O
,
Columbia University
Alireza Tahbaz-Salehi
,
Northwestern University

Abstract

This paper studies the optimal conduct of monetary policy in a multi-sector economy in which firms buy and sell intermediate goods over a production network. We first provide a necessary and sufficient condition for the monetary policy’s ability to implement flexible-price equilibria in the presence of nominal rigidities and show that, generically, no monetary policy can implement the first-best allocation. We then characterize the constrained-efficient policy in terms of the economy’s production network and the extent and nature of nominal rigidities. Our characterization result yields general principles for the optimal conduct of monetary policy in the presence of input-output linkages: it establishes that optimal policy stabilizes a price index with higher weights assigned to larger, stickier, and more upstream industries, as well as industries that face stronger strategic complementarities in price setting.

Fiscal Policy, Labor Mobility and Regional Development. The Case of Italy's South.

Gian Luca Clementi
,
New York University
Daniele Coen-Pirani
,
University of Pittsburgh

Abstract

We study the aggregate implications of fiscal transfers across regions within a country, with a focus on Italy. Net fiscal transfers from the North to the South of Italy are large, corresponding to almost one quarter of Southern GDP. Results from a quantitative spatial model with endogenous labor supply suggest that reducing these transfers would have the effect of relocating population to the North, the most productive area, and raise aggregate employment. In turn, both factors would contribute to raising the country's GDP. Interestingly, the model tells us that labor input and value added would grow faster in the South, thereby reducing Italy's internal development disparities.

Optimal Monetary and Fiscal Policy with Investment Spillovers and Endogenous Private Information

Luca Colombo
,
Catholic University of the Sacred Heart
Gianluca Femminis
,
Catholic University of the Sacred Heart
Alessandro Pavan
,
Northwestern University

Abstract

We study optimal monetary and fiscal policy in economies with investment spillovers, endogenous private information, and nominal and real rigidities. We show that complementarities in firms’ early investment decisions call for a novel structure of the optimal fiscal rule. We also show that policies that are optimal when information is exogenous need not be optimal when information is endogenous. Lastly, we identify conditions under which the decentralized efficient acquisition and usage of information can be implemented by an appropriate combination of monetary and fiscal policies.

Debt Sustainability in a Low Interest Rate World

Neil Mehrotra
,
Federal Reserve Bank of New York
Dmitriy Sergeyev
,
Bocconi University

Abstract

Conditions of secular stagnation - low output growth g and low interest rates r - have counteracting effects on the cost of servicing public debt, r − g. Using data for advanced economies, we document that r is often less than g, but r − g exhibits substantial variability over the medium-term. We build a continuous-time model in which the debt-to-GDP ratio is stochastic and r < g on average. We analytically characterize the distribution of the debt-to-GDP ratio, showing how two candidate explanations for low interest rates, slower trend growth and higher output risk, can lower the debt-to-GDP ratio. When the primary surplus is bounded, we characterize a state-dependent fiscal limit, above which default occurs. Slower trend growth improves debt sustainability, while higher output risk reduces the interest rates for most of the equilibrium levels of debt but also tightens the fiscal limit. A calibration for the US gives a fiscal limit of 150-220 percent of GDP.
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook