Inequality and monetary policy: THRANK model

Pavel Vikharev (), Anna Novak and Andrei Shulgin ()
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Pavel Vikharev: Bank of Russia, Russian Federation
Andrei Shulgin: Bank of Russia, Russian Federation

No wps113, Bank of Russia Working Paper Series from Bank of Russia

Abstract: The paper explores the mutual influence of inequality and monetary policy. The model introduces household heterogeneity in terms of access to the financial market and intertemporal preferences. The parameters are calibrated and estimated based on both Russia's microdata (including RLMS-HSE and HBS) and macro statistics. We have shown that the introduction of households with no access to the financial market has only a slight impact on the transmission of a monetary policy shock, while its secondary effects help amplify the action of most structural shocks. The behavior of wealthy hand-to-mouth households amplifies the response of macroeconomic variables to the monetary policy shock but has a slight impact on these variables' responses to most of the other structural shocks. We have identified non-structural inequality shocks at the bottom and the top of the Lorenz curve. As a result, we have found that the mutual influence of inequality and monetary policy is limited. The interest rate immediate response to changes in the Gini consumption index equals 0.1 for inequality shocks and 10 for a monetary policy shock. We have demonstrated that the shocks at the top of the Lorenz curve cause a more persistent response from the economy, whereas the shock at the bottom of the Lorenz curve. On first approximation, only one integral inequality indicator can be used to study the role of inequality in a business cycle. The relative consumption dynamics for specified household groups is not a conclusive indicator of either pro- or disinflationary policy, but it provides additional data to help identify structural shocks.

Keywords: monetary policy; inequality; THRANK; inequality shock; hand-to-mouth; Russia; Lorenz curve; household heterogeneity; Wealthy HtM (search for similar items in EconPapers)
JEL-codes: E21 E44 E52 E58 (search for similar items in EconPapers)
Pages: 99 pages
Date: 2023-07
New Economics Papers: this item is included in nep-cba, nep-cis, nep-dge and nep-mon
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