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Inequality-Constrained Monetary Policy in a Financialized Economy

Luca Eduardo Fierro (), Federico Giri and Alberto Russo
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Luca Eduardo Fierro: Institute of Economics, Scuola Superiore Sant’Anna Pisa, Italy

No 2023/02, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: We study how income inequality affects monetary policy through the inequalityhousehold debt channel. We design a minimal macro Agent-Based model that replicates several stylized facts, including two novel ones: falling aggregate saving rate and decreasing bankruptcies during the household’s debt boom phase. When inequality meets financial liberalization, a leaning against-the-wind strategy can preserve financial stability at the cost of high unemployment, whereas an accommodative strategy can dampen the fall of aggregate demand at the cost of larger leverage. We conclude that inequality may constrain the central bank, even when it is not explicitly targeted.

Keywords: Inequality; Financial Fragility; Monetary Policy; Agent-Based Model. (search for similar items in EconPapers)
JEL-codes: E21 E25 E31 E52 G51 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-cmp, nep-hme and nep-mon
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Related works:
Journal Article: Inequality-constrained monetary policy in a financialized economy (2023) Downloads
Working Paper: Inequality-Constrained Monetary Policy in a Financialized Economy (2023) Downloads
Working Paper: Inequality-Constrained Monetary Policy in a Financialized Economy (2023) Downloads
Working Paper: Inequality-Constrained Monetary Policy in a Financialized Economy (2022) Downloads
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