Should Central Banks Have an Inequality Objective?

Roberto Chang

No 30667, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Should central banks care about inequality? To address this question, we extend a standard model of time inconsistency in monetary policy to allow for heterogeneity. As in the standard analysis, lack of policy commitment leads to a bias towards socially excessive inflation. But the novel result is that, in the presence of heterogeneity, the bias can be offset by assigning the central bank a mandate under which agents with higher nominal wealth are given a higher relative weight than under the social welfare function. In other words, society should choose a central banker that is less egalitarian than itself, a result reminiscent of Rogoff’s “conservative central banker”. Our analysis underscores that including a concern for redistribution in the central bank’s mandate can enhance policy credibility, but the details can be unexpected and should reflect the role of the mandate in overcoming policy distortions.

JEL-codes: E6 F4 (search for similar items in EconPapers)
Date: 2022-11
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
Note: EFG IFM ME
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