Workers, capitalists, and the government: fiscal policy and income (re)distribution

• Published in: Journal of monetary economics Vol. 119; pp. 58 - 74
• Main Authors: Cantore, Cristiano, Freund, Lukas B.
• Format: Journal Article
• Language: English
• Published: Netherlands Elsevier B.V 01.04.2021; North-Holland Pub. Co
• Subjects: Fiscal policy; HANK; Heterogeneity; TANK; E62; Fiscal policy; Heterogeneity; E21; E32; HANK; E12; E25; TANK
• ISSN: 0304-3932; 1873-1295
• DOI: 10.1016/j.jmoneco.2021.01.004

•Propose a tractable capitalist-worker New Keynesian model to study the interaction of household heterogeneity and fiscal policy.•Modeling limited asset market participation through portfolio adjustment costs generates a realistic pattern of intertemporal marginal propensities to consume.•The capitalist-worker structures ensures that the transmission of demand shocks under sticky prices does not rely on income effects on labor supply induced by countercyclical markups.•Relative to the predictions of the traditional two-agent model, fiscal multipliers are smaller; and the sensitivity of the output path to public deficits is dampened.•Overall, the model matches the implications of richer Heterogeneous-Agent New Keynesian (HANK) models in key respects, while remaining analytically tractable. We propose a novel two-agent New Keynesian model to study the interaction of fiscal policy and household heterogeneity in a tractable environment. Workers can save in bonds subject to portfolio adjustment costs; firm ownership is concentrated among capitalists who do not supply labor. The model is consistent with micro data on empirical intertemporal marginal propensities to consume, and it avoids implausible profit income effects on labor supply. Relative to the traditional two-agent model, these features imply, respectively, a lower sensitivity of consumption to the composition of public financing; and smaller fiscal multipliers alongside pronounced redistributive effects.