Managing Inequality over Business Cycles: Optimal Policies with Heterogeneous Agents and Aggregate Shocks

François Le Grand (1, 2) , Xavier Ragot (3, 4, 5)

1 EM - emlyon business school
2 ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]
3 ECON - Département d'économie (Sciences Po)
4 CNRS - Centre National de la Recherche Scientifique
5 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

We present a truncation theory of idiosyncratic histories for heterogeneous-agent models. This method allows us to solve for optimal Ramsey policies in such models with aggregate shocks. The method can be applied to a large variety of settings, with occasionally binding credit constraints. We use this theory to characterize the optimal level of unemployment insurance over the business cycle in a production economy. We find that the optimal policy is countercyclical.

Keywords: Incomplete Markets; Optimal Policies; Heterogeneous Agent Models

Domains: Humanities and Social Sciences; Economics and Finance

François Le Grand, Xavier Ragot. Managing Inequality over Business Cycles: Optimal Policies with Heterogeneous Agents and Aggregate Shocks. International Economic Review, In press, 63 (1), pp.511-540. ⟨10.1111/iere.12537⟩. ⟨hal-03501381⟩