Inequality and the zero lower bound

Jesús Fernández-Villaverde, Joël Marbet, Galo Nuño and Omar Rachedi
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Jesús Fernández-Villaverde: UNIVERSITY OF PENNSYLVANIA
Joël Marbet: BANCO DE ESPAÑA
Galo Nuño: BANCO DE ESPAÑA
Omar Rachedi: ESADE BUSINESS SCHOOL

No 2407, Working Papers from Banco de España

Abstract: This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households’precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality.

Keywords: heterogeneous agents; HANK models; neural networks; non-linear dynamics (search for similar items in EconPapers)
JEL-codes: D31 E12 E21 E31 E43 E52 E58 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2024-02
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2407

DOI: 10.53479/36133

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