Keeping Up with the Joneses and the Welfare Effects of Monetary Policy

Juha Tervala ()
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Juha Tervala: Aboa Centre for Economics and University of Turku

No 65, Discussion Papers from Aboa Centre for Economics

Abstract: This paper examines the implications of "keeping up with the Joneses" preferences (jealousy) for the welfare effects of monetary policy. I develop a New Keynesian model, where households are jealous and the central bank follows the Taylor rule. I show that the welfare effects of monetary policy over time depend significantly on the relative strength of the consumption externality caused by jealousy and the monopolistic distortion. If jealousy (the monopolistic distortion) dominates, then a decrease in the interest rate reduces (increases) welfare in the short run, but increases (reduces) welfare in the medium run.

Keywords: Monetary policy; jealousy; consumption externality (search for similar items in EconPapers)
JEL-codes: E40 E50 E52 (search for similar items in EconPapers)
Pages: 18
Date: 2011-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: Keeping up with the Joneses and the welfare effects of monetary policy (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:tkk:dpaper:dp65

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