Presenter: Wendy A. Morrison
Affiliation: Columbia University, Department of Economics.
Date: September 26, 2023
Time: 12:00 GMT (15:00 Israel Time)
Abstract: We study optimal monetary policy in a dynamic, general equilibrium economy with heterogeneous agents. All heterogeneity is ex-ante: workers differ in type-specific, state-contingent labor productivity, yet markets are complete. The fiscal authority has access to a uniform, state-contingent lump-sum tax (or transfer), but linear taxes are restricted to be non-state contingent. We derive sufficient conditions under which implementing flexible-price allocations is optimal. We show that such allocations are not optimal when the relative labor income distribution varies with the business cycle; in such cases, optimal monetary policy implements a state-contingent mark-up that co-moves positively with a sufficient statistic for labor income inequality.
Coauthor: Jennifer La’O (Columbia University).