Should Inequality Factor into Central Banks’ Decisions?
54 Pages Posted: 30 May 2023
Date Written: April 26, 2023
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.
Keywords: inequality, optimal monetary policy, Taylor rules
JEL Classification: E21, E32, E52
Suggested Citation: Suggested Citation