Inequality and the zero lower bound

Abstract

This paper studies how household inequality shapes the effects of the nominal interest rate zero lower bound (ZLB) 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 non-linear stochastic equilibrium by using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households’ precautionary saving 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. the extent to which 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: D31, E12, E21, E31, E43, E52, E58