Marcus Hagedorn
ABSTRACT Heterogeneous agent incomplete markets models offer a new perspective on price and inflation determination. In contrast to complete markets, the price level is determined from the asset‐market clearing condition. Fiscal and monetary policy then jointly and uniquely determine the finite steady‐state price level and the inflation rate, including in a steady state in which the nominal interest rate is constant. Fiscal policy can determine the long‐run inflation rate for a fiscal rule which sets the growth rate of nominal government debt, whereas both fiscal and monetary policy determine the long‐run inflation rate under different tax rules.