2023/05 | LEM Working Paper Series | ||||||||||||||||
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Inequality-Constrained Monetary Policy in a Financialized Economy |
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Luca Eduardo Fierro, Federico Giri and Alberto Russo |
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Keywords | |||||||||||||||||
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Inequality; Financial Fragility; Monetary Policy; Agent-Based Model.
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JEL Classifications | |||||||||||||||||
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D31, E21, E25, E31, E52, G51
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Abstract | |||||||||||||||||
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We study how income inequality affects monetary policy through the inequality-household debt
channel. We design a minimal macro Agent-Based model that replicates several stylized facts, including
two novel ones: falling aggregate saving rate and decreasing bankruptcies during the household's
debt boom phase. When inequality meets financial liberalization, a leaning against-the-wind strategy
can preserve financial stability at the cost of high unemployment, whereas an accommodative
strategy, i.e. lowering the policy rate, can dampen the fall of aggregate demand at the cost of larger
leverage. We conclude that inequality may constrain the central bank, even when it is not explicitly
targeted.
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