Distributional Impacts of Low for Long Interest Rates

Jeremy Kronick and Francisco Villarreal

MPRA Paper from University Library of Munich, Germany

Abstract: This paper asks whether tepid inflation in Canada since the financial crisis can in part be explained by the effects of monetary policy on inequality. Using different structural vector autoregression models we show that expansionary monetary policy post-crisis has led to increased inequality as more resources are shifted away from lower-income individuals, which in general have higher marginal propensities to consume. As a result, aggregate demand has not risen as much as it otherwise would have, leading to a more muted inflationary response. Our results suggest that failure to account for the heterogeneity of consumption responses across the income distribution could lead to an underestimation of the magnitude of inflation’s response to a monetary policy shock.

Keywords: monetary policy; inequality; inflation puzzles (search for similar items in EconPapers)
JEL-codes: E25 E31 E52 (search for similar items in EconPapers)
Date: 2019-04-23
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Distributional impacts of low for long interest rates (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:93483

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