Monetary policy, heterogeneous population and inflation
Research in Economics, 2019, vol. 73, issue 4, 277-292
Adding heterogeneity to an otherwise simple model results in a deviation from the Friedman rule. We show that a central bank concerned with inequality delivers an outcome below the Pareto frontier. Our results may shed light as to why central banks around the world do not follow the Friedman rule and instead deliver positive inflation rates. On the other hand, the calibrated model indicates that the implied optimal inflation rates are much higher than those observed in the data. One possible interpretation of our results is to question the recent wisdom of thinking of inequality as part of central banks’ concerns.
Keywords: Monetary policy; Heterogeneity; Central bank; Inequality; Inflation; Ramsey policy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:73:y:2019:i:4:p:277-292
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