Working Papers

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

With François Le Grand and Xavier Ragot.

Draft. Revision requested at the Review of Economic Studies.

We derive optimal monetary policy in a heterogeneous-agent economy with nominal frictions and aggregate shocks, considering three assumptions about fiscal policy. First, when time-varying linear taxes on capital and labor can be optimally set, we theoretically prove that optimal monetary policy implements price stability. This implies that monetary policy should focus on ensuring price stability and let fiscal policy deal with redistribution. Second, using both a sequence of simple models and a quantitatively relevant setup, we show that under a standard calibration, the optimal inflation volatility remains low – but positive – when tax rates are constant, and that it tends towards zero when we allow for simple time-varying exogenous tax rates. Third, we consider a constrained-optimal fiscal policy, in which we fix some fiscal tools and let the others be optimally set. We then find that the optimal inflation volatility is also close to zero. In all three cases we find that fiscal policy is more efficient than monetary policy to provide insurance against aggregate shocks.

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.