Raising Interest Rates for Improving Income

Guillermo Peña

Journal of Central Banking Theory and Practice, 2023, vol. 12, issue 3, 199-217

Abstract: This paper illustrates a case where an increase of the interest rates improves the economic activity and reduces income inequality. This theoretical exercise deals with a simple model of disequilibrium with accountant identities of budget constraints. In addition, and following previous models, the effect of the COVID-19 shock is considered, by reflecting asymmetric repercussions that increase income inequality. A simple empirical exercise confirms some of the previous results. The proposed explanation is that, for the euro area, this shock has affected more middle-income households such as the retailers harmed by the compulsory lockdown who have increased their debts.

Keywords: Monetary policy; Income inequality; Financial sector; Black Swan; COVID-19; Unemployment. (search for similar items in EconPapers)
JEL-codes: E25 E52 E58 G21 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:cbk:journl:v:12:y:2023:i:3:p:199-217

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