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

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 24 April 2020

Staff Working Paper No. 858

By Cristiano Cantore and Lukas B Freund

This paper develops a tractable capitalist-worker New Keynesian model to study the interaction of fiscal policy and household heterogeneity. Workers can save in bonds subject to portfolio adjustment costs; firm ownership is concentrated among capitalists who do not supply labor. The model matches empirical intertemporal marginal propensities to consume that shape the private sector’s dynamic response to policy interventions, it avoids implausible profit income effects on labor supply and the solution has robust stability properties. This setup delivers both more pronounced redistributive and more muted aggregate effects of fiscal stimulus relative to the traditional two-agent model.

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

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