The distributional effects of systemic monetary policy
Gornemann et al. develop a New Keynesian heterogeneous-agent DSGE model that features asset-market incompleteness, heterogeneity in preferences, skills, and age, a frictional labor market, and sticky prices. They then identify the channel through which systemic monetary policy creates winners and losers:
- When the central bank stabilizes inflation, it raises average markups. Wages fall with economic activity, and corporate profits are stabilized at the expense of labor income. As hawkish monetary stabilization policy reduces the labor share, it also leads to windfall gains to financial capital and raises the supply of financial assets by value;
- The households that gain from inflation stabilization are the wealth-rich (for whom labor income is a small part of lifetime wealth) and retirees (who tend to have assets, but are not exposed to labor income).
Doves for the Rich, Hawks for the Poor? Distributional Consequences of Systematic Monetary Policy
Authors: Nils Gornemann, Keith Kuester, Makoto Nakajima
From: Board of Governors of the Federal Reserve System, University of Bonn, Federal Reserve Bank of Philadelphia
Monetary policy in a high inequality environment
In a high inequality environment recessionary episodes become more severe and disadvantaged groups experience much greater-than-average increases in their unemployment rates. In this paper, Feiveson et al. show that if policymakers can move to alternative strategies, such as average inflation targeting and price-level targeting, in order to stabilize inflation, they may be successful at improving the economic well-being of disadvantaged households.
In a heterogeneous agent New Keynesian (HANK) model, households can insure earnings risk only imperfectly because of frictions in financial markets, and as a result, consumption levels vary with individual labor market histories. During a recessionary episode, these households end up cutting back their consumption after exhausting all available access to credit. Unlike the representative agent New Keynesian model, which assumes that the proportion of poor households remains constant, HANK models indicate that the number of poor households actually increases during downturns.
We also show that the macroeconomic stabilization benefits from such alternative strategies can be substantially larger in a HANK environment than in a representative agent New Keynesian model. We argue that gains in employment outcomes from switching to an alternative strategy would generate disproportionate improvements for historically disadvantaged households and thus have potentially long-lasting effects on the economic well-being of these groups.
Distributional Considerations for Monetary Policy Strategy
Authors: Laura Feiveson, Nils Goernemann, Julie Hotchkiss, Karel Mertens, Jae Sim
From: Board of Governors of the Federal Reserve System, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Dallas
