Journal of Political Economy Macroeconomics, Vol.1, Issue 4, 2023

We show that in a New Keynesian model with household heterogeneity, fiscal policy can be a perfect substitute for monetary policy. Three simple conditions for consumption taxes, labor taxes, and the government debt level are sufficient to induce the same consumption and labor supply of each household and, thus, the same allocation as interest rate policies. When monetary policy is constrained by a binding lower bound, a currency union, or an exchange rate peg, fiscal policy can therefore replicate any allocation that hypothetically unconstrained monetary policy would generate.

Draft available upon request.

I study the transmission mechanism of Quantitative Easing (QE) in the form of large-scale asset purchases in the mortgage market to aggregate consumption. I build a New Keynesian model with heterogeneous households, a microfounded housing market, and frictional intermediation. This model provides a theory for the empirical evidence that QE transmits to aggregate consumption through increasing house prices. I find that higher house prices account for around half of the stimulative effects of QE with higher labor income accounting for the remaining half.

Draft available upon request.

We study the effects of movements in aggregate lending standards on macroeconomic aggregates and inequality in a New Keynesian model with heterogeneous households and housing. We show that a looser loan-to-value (LTV) ratio stimulates housing demand, nondurable consumption, and output. We highlight that LTV shocks are mainly transmitted to macroeconomic aggregates through general equilibrium effects in the form of higher house prices and labor income. We also show that looser LTV limits redistribute housing wealth from the top 10% to the bottom 50% indicating an overall decrease of inequality.