Household Heterogeneity and the Performance of Monetary Policy Frameworks

Edouard Djeutem, Mario He, Abeer Reza and Yang Zhang

Staff Working Papers from Bank of Canada

Abstract: We compare the performance of alternative monetary policy frameworks (inflation targeting, average inflation targeting, price level targeting and nominal GDP level targeting) in a tractable HANK model where incomplete financial markets and idiosyncratic earnings risk introduce precautionary savings and consumption inequality. Financial market incompleteness generates an additional source of societal welfare loss due to cyclical fluctuations in inequality on top of those from inflation and output volatility. We find that history-dependent policies are preferred in this framework. However, if central banks put a high weight on curbing inequality, AIT and IT can be preferred over PLT.

Keywords: Monetary policy framework; Monetary policy transmission; Monetary policy and uncertainty; Economic models (search for similar items in EconPapers)
JEL-codes: D31 D52 E21 E31 E58 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2022-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:22-12

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