Income Inequality, Financial Crises, and Monetary Policy

Isabel Cairo and Jae Sim

No 2018-048, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We construct a general equilibrium model in which income inequality results in insufficient aggregate demand, deflation pressure, and excessive credit growth by allocating income to agents featuring low marginal propensity to consume, and if excessive, can lead to an endogenous financial crisis. This economy generates distributions for equilibrium prices and quantities that are highly skewed to the downside due to financial crises and the liquidity trap. Consequently, symmetric monetary policy rules designed to minimize fluctuations around fixed means become inefficient. A simultaneous reduction in inflation volatility and mean unemployment rate is feasible when an asymmetric policy rule is adopted.

Keywords: Monetary policy; Credit; Financial crises; Income inequality (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 G01 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2018-07-19
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Income Inequality, Financial Crises and Monetary Policy (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2018-48

DOI: 10.17016/FEDS.2018.048

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