Deficit-financed fiscal policy plays a crucial role in alleviating the effects of short-run business cycle fluctuations. However, its benefits must be weighed against the costs of future taxation required to service the additional debt. In this paper, we analyze this welfare trade-off by decomposing and quantifying the channels through which fiscal policy impacts aggregate welfare in a Heterogeneous Agent New Keynesian (HANK) model. Our decomposition and quantification shows that, beyond macroeconomic stabilization and redistribution, deficit-financed fiscal policy generates welfare benefits largely through two mechanisms: i) a self-financing channel, and ii) a liquidity channel. We apply our decomposition to create policy ranking measures like Benefits-to-Cost Ratio and the Marginal Value of Public Funds within the HANK model. Using these measures, we compare and rank various fiscal policies—including targeted transfers, mortgage principal relief, moratoriums, and unemployment insurance—based on their overall welfare benefits and 'bang for buck'.

Central banks analyse copious amounts of information to assess the economic outlook to then set monetary policy. So, could changes in monetary policy reveal some additional information about the economic outlook to the public? This channel is known as the ‘information effect’. The information effect posits that, in addition to the usual effects of monetary policy, agents interpret an interest rate increase as signalling some additional positive economic information. This effect, if strong enough, could then lead to dynamics where an increase in interest rates causes an expansion in economic activity. \n

I evaluate whether the information effect can be detected in Australia through the lens of equity markets. I find that, contrary to the predictions of the information effect, a surprise monetary tightening from a monetary policy announcement causes equity prices to fall. I also show that this response in equity prices is, at least in part, driven by downward adjustments in expected earnings growth. These responses are consistent with conventional views of the effects of monetary policy. However, looking beyond monetary policy announcements yields some evidence that an information effect could be present through other forms of Reserve Bank of Australia (RBA) communication. I find speeches delivered by the RBA Governor generate responses in equity prices and earnings forecasts consistent with the information effect. But this result appears to be the exception rather than the rule. For most monetary policy communication, at least in equity markets, the information effect is not an important channel of monetary policy.

We document that the effect of monetary policy on housing prices varies substantially by local housing market. We show that this heterogeneity across local housing markets can be partly explained by variation in housing supply conditions – housing prices are typically more sensitive to changes in interest rates in areas where land is more expensive. But other factors are important too. Specifically, we find the sensitivity is greater in areas where incomes are relatively high, households are more indebted and there are more investors. Taken together, this suggests that the state of the economy can affect the sensitivity of housing prices to monetary policy. We also directly explore how monetary policy affects housing wealth inequality. We find that housing prices in more expensive areas are more sensitive to changes in interest rates than in cheaper areas. This suggests that lower interest rates increase housing wealth inequality, while higher rates do the opposite. However, these effects appear to be temporary.