This paper presents a capitalist-worker New Keynesian model for fiscal policy analysis that

incorporates insights from the recent heterogeneous agent, incomplete markets literature

while preserving the tractability of a two-agent framework. In the model, capitalists earn

income from firm profits and investing in physical capital, while workers only receive labor

income. Portfolio adjustment costs deliver realistic intertemporal marginal propensities to

consume, and the concentration of profit income among wealthy capitalists avoids implausible

income effects on labor supply. The embedded fiscal transmission mechanism implies that

deficit-financing is expansionary due to redistributive effects. We estimate a medium-scale

version of the model by Bayesian impulse response matching, drawing on a novel stylized

fact: the response of the labor share of income to an unanticipated increase in government

purchases is positive, persistent and hump-shaped. The model is able to replicate this

characteristic pattern and the dynamics of other key macroeconomic variables under a

plausible parameterization, suggesting that not only the presumed transmission mechanism

is better in line with micro evidence but also that the implied aggregate dynamics fit macro

data well.