Distributional Considerations for Monetary Policy Strategy

27 Pages Posted: 2 Sep 2020

See all articles by Laura Feiveson

Laura Feiveson

Board of Governors of the Federal Reserve System

Nils Gornemann

Board of Governors of the Federal Reserve System

Julie L. Hotchkiss

Federal Reserve Bank of Atlanta; Georgia State University - Department of Economics

Karel Mertens

Federal Reserve Banks - Federal Reserve Bank of Dallas

Jae Sim

Board of Governors of the Federal Reserve System

Date Written: August, 2020

Abstract

We show that makeup strategies, such as average inflation targeting and price-level targeting, can be more effective than a flexible inflation targeting strategy in overcoming the obstacles created by the effective lower bound in a heterogeneous agent New Keynesian (HANK) model. 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.

Keywords: Heterogeneous agent New Keynesian model, Representative agent New Keynesian model, Effective lower bound, Inequality, Hand to mouth, Average inflation targeting, Price-level targeting

JEL Classification: D31, E30, E52

Suggested Citation

Feiveson, Laura and Gornemann, Nils and Hotchkiss, Julie L. and Mertens, Karel and Sim, Jae W., Distributional Considerations for Monetary Policy Strategy (August, 2020). FEDS Working Paper No. 2020-073, Available at SSRN: https://ssrn.com/abstract=3684910 or http://dx.doi.org/10.17016/FEDS.2020.073

Laura Feiveson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
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Nils Gornemann

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
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Julie L. Hotchkiss

Federal Reserve Bank of Atlanta ( email )

Research Department
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Georgia State University - Department of Economics ( email )

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Karel Mertens

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Jae W. Sim

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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