Abstract
This paper develops a tractable capitalist-worker New Keynesian model to study the interaction of fiscal policy and household heterogeneity. Workers can save in bonds subject to portfolio adjustment costs; firm ownership is concentrated among capitalists who do not supply labor. The model matches empirical intertemporal marginal propensities to consume that shape the private sector’s dynamic response to policy interventions, it avoids implausible profit income effects on labor supply and the solution has robust stability properties. This setup delivers both more pronounced redistributive and more muted aggregate effects of fiscal stimulus relative to the traditional two-agent model.
Highlights
Macroeconomic models with household heterogeneity give rise to aggregate dynamics that can significantly diverge from those implied by their representative-agent counterparts
This remains the case once limited asset market participation is generalized as proposed in the preceding section.19. This feature is implausible when it comes to the monetary transmission mechanism in the textbook representative-agent New Keynesian (RANK) model, as argued by Broer et al (2020a); and it turns out to be quantitatively significant in the propagation of fiscal policy measures according to the benchmark two-agent New Keynesian (TANK) model
This paper introduced a two-agent New Keynesian (TANK) model with capitalists and workers that matches the implications of richer heterogeneous-agent (HANK) models in key dimensions, while remaining tractable
Summary
Macroeconomic models with household heterogeneity give rise to aggregate dynamics that can significantly diverge from those implied by their representative-agent counterparts. Debortoli and Galí (2018) identify different channels through which household heterogeneity influences aggregate fluctuations and argue that the margin captured by traditional TANK models – changes in the average consumption gap between constrained and unconstrained households – is quantitatively the most significant one when evaluating monetary policy, preference, and technology shocks. Their result further motivates our attempt to bring the consumption behavior of constrained households better in line with micro data than is the case when they are treated as entirely hand-to-mouth. Relative to Debortoli and Galí (2018), we explicitly aim to match micro data on households’ dynamic consumption behavior and focus on fiscal policy.
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