What is the optimal size of in-kind benefits, and should governments rely on subsidies or direct provision? In-kind benefits constitute over half of government expenditure in developed countries, yet most models treat them as an exogenous parameter. We develop a new theory of public spending based on two key features: government-provided goods are luxury goods, and they generate externalities that rise with equality. We show that these two conditions are necessary and sufficient for positive optimal public provision. Using empirical evidence, we demonstrate that they hold for most publicly provided goods, particularly health and education. We then embed these findings in a quantitative heterogeneous-agent model with multiple goods consumed both privately and publicly. We find that the stronger the luxury nature of a good and the higher the inequality, the greater the optimal reliance on direct provision over subsidies. Finally, we show that optimal fiscal consolidation should focus more on reducing subsidies than cutting direct provision, especially for goods also consumed privately.

The distributive effects of carbon taxation are critical for its political acceptability and depend on both income and geographic factors. Using French administrative data, household surveys, and matched employer-employee records, we document that rural households spend 2.8 times more on fossil fuels than urban households and are employed in firms that emit 2.7 times more greenhouse gases. We incorporate these insights into a spatial heterogeneous-agent model with endogenous migration and wealth accumulation, linking spatial and macroeconomic approaches. After an increase in carbon taxes, we quantify that rural households face 20\% higher welfare losses than urban households. In an optimal revenue-recycling exercise, we compare transfers targeting income and geography, and show that neglecting for geography reduces welfare gains by 7\%. We conclude that carbon policies should account for spatial differences to improve political feasibility.

What are the effects of central bank balance sheet expansion, and should we worry about central bank losses? Using a Heterogeneous-Agent New Keynesian model incorporating money in utility and an endogenous zero lower bound (ZLB), we study the fiscal-monetary interactions of central bank balance sheet policies. We find that the overall efficiency of asset purchase programs depends on the combination of the expected future size of the balance sheet and the fiscal transmission of central bank losses. First, permanent balance sheet expansions stimulate the economy in the long run and by anticipation, increase inflation and output during the ZLB episode, as they interact with distortionary taxes and imperfect capital markets. Second, upon exiting the ZLB, the central bank incurs losses; issuing securities to offset these losses is more welfare-enhancing than raising taxes.