Inequality and the Zero Lower Bound

35 Pages Posted: 8 Jun 2023

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Joël Marbet

Banco de España

Galo Nuño

Banco de España; Bank for International Settlements (BIS)

Omar Rachedi

ESADE Business School

Multiple version iconThere are 3 versions of this paper

Date Written: 2023

Abstract

This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully nonlinear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households’ precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality.

Keywords: heterogeneous agents, HANK models, neural networks, non-linear dynamics

JEL Classification: D310, E120, E210, E310, E430, E520, E580

Suggested Citation

Fernández-Villaverde, Jesús and Marbet, Joël and Nuño, Galo and Rachedi, Omar, Inequality and the Zero Lower Bound (2023). CESifo Working Paper No. 10471, Available at SSRN: https://ssrn.com/abstract=4470391 or http://dx.doi.org/10.2139/ssrn.4470391

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Joël Marbet

Banco de España ( email )

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Galo Nuño

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Bank for International Settlements (BIS)

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Basel, Basel-Stadt 4002
Switzerland

Omar Rachedi

ESADE Business School ( email )

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Barcelona, 08034
Spain

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