HETEROGENEITY AND REDISTRIBUTION: BY MONETARY OR FISCAL MEANS?

In models with heterogeneous agents, issues of distribution and redistribution jump to the fore, raising the question: Which policies-monetary or fiscal-work most effectively in transferring income between groups? From Townsend's turnpike model, two basic results emerge to help answer this question. First, the zero lower bound on nominal interest rates often appears as an obstacle to redistribution by monetary means. Second, assumptions about the government's ability to raise tax revenue without distortion and to discriminate between agents in distributing that tax revenue play a large role in determining whether agents prefer to redistribute income by fiscal means instead. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.