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Should inequality factor into central banks’ decisions?

Author

Listed:
  • Niels-Jakob H. Hansen

    (International Monetary Fund)

  • Alessandro Lin

    (Bank of Italy)

  • Rui C. Mano

    (International Monetary Fund)

Abstract

Inequality is increasingly a policy concern. It is well known that fiscal and structural policies can mitigate inequality. However, less is known about the potential role of monetary policy. This paper investigates how inequality matters for the conduct of monetary policy within a tractable Two-Agent New Keynesian model. We find some support for making consumption inequality an explicit target for monetary policy, particularly if central banks follow standard Taylor rules. Given the importance of labor income at the lower end of the income distribution, we also consider augmented Taylor rules targeting the labor share. We find that such a rule is preferable to targeting consumption inequality directly. However, under optimal monetary policy the gains from targeting inequality are smaller.

Suggested Citation

  • Niels-Jakob H. Hansen & Alessandro Lin & Rui C. Mano, 2023. "Should inequality factor into central banks’ decisions?," Temi di discussione (Economic working papers) 1410, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1410_23
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2023/2023-1410/en_tema_1410.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    inequality; optimal monetary policy; Taylor rules;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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