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How do inequalities affect the natural interest rate, and how do they impact monetary policy? Comparing Germany, Japan and the US

Mariam Camarero (), Gilles Dufrénot and Cecilio Tamarit
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Gilles Dufrénot: Corresponding author: AMSE and CEPII. email: gilles.dufrenot@univ-amu.fr

No 2105, Working Papers from Department of Applied Economics II, Universidad de Valencia

Abstract: In this paper we analyze how growing income/wealth inequality and the functional income distribution inequality have contributed to the sustained low potential growth observed in the industrialized economies during the last two decades, a period that includes the Great Recession (GR). Growing inequality may constitute a drawback for the recovery of these economies, especially after the Great Pandemic (GP). To this aim, we modify the semi-structural model originally proposed by Holston, Laubach and William, by considering the effects of several types of inequalities. We jointly estimate potential growth and the natural interest rates. We show that the latter can substantially modify the time path of the real interest rate that prevails when economies are at full strength and inflation is stable.

Keywords: Potential growth; Inequality; Natural interest rate; G7; State-space model (search for similar items in EconPapers)
JEL-codes: C32 E21 E52 E62 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
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Working Paper: How do inequalities affect the natural interest rate, and how do they impact monetary policy? Comparing Germany, Japan and the US (2021) Downloads
Working Paper: How do inequalities affect the natural interest rate, and how do they impact monetary policy? Comparing Germany, Japan and the US (2021) Downloads
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