Accepted at Journal of Political Economy Macroeconomics

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.

I study the effects of large scale asset purchases in the mortgage market (QE) on aggregate consumption in a continuous-time heterogeneous agent New Keynesian model with lumpy housing and frictional financial intermediation. I find a salient house price channel of QE. In the presence of binding leverage constraints of intermediaries, QE is relevant through decreasing the borrowing spread. Since housing adjustment is lumpy, this lower spread substantially increases housing demand and house prices through accelerating the adjustment threshold. With heterogeneous agents and borrowing constraints, these higher house prices transmit to aggregate consumption through wealth, collateral, and general equilibrium effects.

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 lumpy housing. We show that a looser LTV ratio stimulates aggregate nondurable consumption and output, and that the transmission mechanism mainly works through general equilibrium effects in the form of higher house prices and labor income. We also show that LTV ratios entail distributional dynamics as households are differently affected by intertemporal prices in a model with incomplete markets. Looser LTV limits redistribute housing wealth from the top 10% to the bottom 50% indicating an overall decrease of inequality.