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Raising Interest Rates for Improving Income

Author

Listed:
  • Guillermo Peña

    (Department of Economic Analysis and IEDIS, University of Zaragoza, Spain)

Abstract

This paper illustrates a case where an increase of the interest rates improves the economic activity and reduces income inequality. This theoretical exercise deals with a simple model of disequilibrium with accountant identities of budget constraints. In addition, and following previous models, the effect of the COVID-19 shock is considered, by reflecting asymmetric repercussions that increase income inequality. A simple empirical exercise confirms some of the previous results. The proposed explanation is that, for the euro area, this shock has affected more middle-income households such as the retailers harmed by the compulsory lockdown who have increased their debts.

Suggested Citation

  • Guillermo Peña, 2023. "Raising Interest Rates for Improving Income," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 12(3), pages 199-217.
    • Handle: RePEc:cbk:journl:v:12:y:2023:i:3:p:199-217
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    File URL: http://www.cbcg.me/repec/cbk/journl/vol12no3-10.pdf
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    More about this item

    Keywords

    Monetary policy; Income inequality; Financial sector; Black Swan; COVID-19; Unemployment.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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