Should Inequality Factor into Central Banks’ Decisions?

54 Pages Posted: 30 May 2023

See all articles by Niels-Jakob Hansen

Niels-Jakob Hansen

International Monetary Fund (IMF)

Alessandro Lin

Bank of Italy

Rui C. Mano

International Monetary Fund

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

Hansen, Niels-Jakob and Lin, Alessandro and Mano, Rui C., Should Inequality Factor into Central Banks’ Decisions? (April 26, 2023). Bank of Italy Temi di Discussione (Working Paper) No. 1410, Available at SSRN: https://ssrn.com/abstract=4464016 or http://dx.doi.org/10.2139/ssrn.4464016

Niels-Jakob Hansen

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alessandro Lin (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Rui C. Mano

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://sites.google.com/site/ruimano/

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