Research

Working Papers

Should monetary policy care about redistribution? Optimal fiscal and monetary policy with heterogeneous agents

With François Le Grand and Xavier Ragot.

Draft. R\&R Economic Studies (2nd round).

We derive optimal monetary policy in a heterogeneous-agent economy with nominal frictions and aggregate shocks. We analyze the model with either sticky prices or sticky wages, and different assumptions about fiscal policy. In the sticky-price economy, when fiscal policy is optimally set, optimal monetary policy implements price stability. Inflation volatility remains low when fiscal policy follows empirically relevant rules, except when the slope of the Phillips curve is large and when the distribution of profits is tilted toward high-productive agents. In the sticky-wage economy, optimal price inflation is much more volatile, but wage inflation stays very small. Under both assumptions regarding rigidity, the lower the productivity of agents, the more they benefit from optimal monetary policy.

Work in Progress

When should we tax firms? Optimal corporate taxation with firm heterogeneity

Job Market Paper New draft coming soon

Corporate fiscal policy over the business cycle is carried out in very different ways over time and across countries. Moreover, little is known about how it should be conducted. This paper studies the design of optimal fiscal policy in a heterogeneous firm environment, when the economy is hit by aggregate shocks. It provides tools to understand when and how heterogeneous firms should be taxed or subsidized over cycles. To tackle this issue, I first solve a tractable model which delivers a simple distribution of firms. In this framework, I provide an analytical characterization of the corporate tax rate over the business cycle. Then, using a fully fledged heterogeneous firm model and cutting-edge computational method, I solve for the optimal path of the tax rate in this environment. My main result is that, in both exercises, the variation of the optimal tax rate depends on the expected persistence of the aggregate shock. This is due to the presence of financial constraints that prevent the allocation of capital from being optimal. I show that the magnitude of this problem varies over the business cycle depending on the persistence of the aggregate shock. When the shock is very persistent, this problem decreases and the optimal tax rate is pro-cyclical. On the contrary, when the shock is not persistent, this problem increases and the optimal tax rate is counter-cyclical.

Firms’ Marginal Propensities to Invest

Old Draft. New draft coming soon

How to stimulate aggregate investment? There are different transmission channels from macroeconomic policies to firm’s investment. Changes in firms’ income is an important one. Therefore, designing efficient counter-cyclical policies requires an understanding of how changes in firms’ income translate into changes in firms’ investment and which firms are the most responsive to such policies. In this paper, I use a new method to estimate firms’ marginal propensities (MPIs) to invest out of a transitory liquid income shock. I use a semi-structural method developed in the household literature and I show that this method can overcome difficulties encountered in previous estimations. I also investigate MPIs heterogeneity across firms. I show that firms’ MPIs are positive and significantly different from 0. On average, firms use 14.4% of the change in current income caused by a transitory income shock to invest. Moreover, firms that face financial constraints and/or firms that face liquidity constraints have higher MPIs than the ones that don’t. Finally, I show that MPIs are very heterogeneous across sectors.

Do firm heterogeneous expectations drive misallocation?

With Erwan Gautier and Paul Hubert.

The Heterogeneous Effects of Bank Losses?

With John Kramer and Tobias Renkin.