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How do inequalities affect the natural interest rate, and how do they impact monetary policy? Comparing Germany, Japan and the US

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Abstract

In this paper we analyze how growing income/wealth inequality and the functional income distribution inequality have contributed to the sustained low potential growth observed in the industrialized economies during the last two decades, a period that includes the Great Recession (GR). Growing inequality may constitute a drawback for the recovery of these economies, especially after the Great Pandemic (GP). To this aim, we modify the semi-structural model originally proposed by Holston, Laubach and William, by considering the effects of several types of inequalities. We jointly estimate potential growth and the natural interest rates. We show that the latter can substantially modify the time path of the real interest rate that prevails when economies are at full strength and inflation is stable.

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  • Mariam Camarero & Gilles Dufrénot & Cecilio Tamarit, 2021. "How do inequalities affect the natural interest rate, and how do they impact monetary policy? Comparing Germany, Japan and the US," AMSE Working Papers 2123, Aix-Marseille School of Economics, France.
    • Handle: RePEc:aim:wpaimx:2123
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    Cited by:

    1. Juzhong Zhuang, 2023. "Income and Wealth Inequality in Asia and the Pacific: Trends, Causes, and Policy Remedies," Asian Economic Policy Review, Japan Center for Economic Research, vol. 18(1), pages 15-41, January.

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    More about this item

    Keywords

    potential growth; Inequality; natural interest rate; G7; state-space model;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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