Keeping up with the Joneses and the welfare effects of monetary policy

Juha Tervala

Journal of Economic Psychology, 2012, vol. 33, issue 1, 104-111

Abstract: This paper examines the implications of “keeping up with the Joneses” preferences (jealousy) for the welfare effects of monetary policy. I develop a New Keynesian model, where households are jealous and the central bank follows the Taylor rule. I show that the welfare effects of monetary policy over time depend significantly on the relative strength of the consumption externality caused by jealousy and the monopolistic distortion. When a first-order approximation of the utility function is used, then the main result is the following: If jealousy (the monopolistic distortion) dominates, then a decrease in the interest rate reduces (increases) welfare in the short run, but increases (reduces) welfare in the medium run. However, the use of a second-order approximation changes the sign of the overall welfare effect of monetary policy if the initial level of employment is at the optimal level or just below it.

Keywords: Monetary policy; Jealousy; Consumption externality (search for similar items in EconPapers)
JEL-codes: E50 E60 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joepsy:v:33:y:2012:i:1:p:104-111

DOI: 10.1016/j.joep.2011.08.014

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