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Should inequality factor into central banks’ decisions?

Niels-Jakob H. Hansen (nhansen@imf.org), Alessandro Lin and Rui Mano
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Niels-Jakob H. Hansen: International Monetary Fund

No 1410, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Inequality is increasingly a policy concern. It is well known that fiscal and structural policies can mitigate inequality. However, less is known about the potential role of monetary policy. This paper investigates how inequality matters for the conduct of monetary policy within a tractable Two-Agent New Keynesian model. We find some support for making consumption inequality an explicit target for monetary policy, particularly if central banks follow standard Taylor rules. Given the importance of labor income at the lower end of the income distribution, we also consider augmented Taylor rules targeting the labor share. We find that such a rule is preferable to targeting consumption inequality directly. However, under optimal monetary policy the gains from targeting inequality are smaller.

Keywords: inequality; optimal monetary policy; Taylor rules (search for similar items in EconPapers)
JEL-codes: E21 E32 E52 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
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