The Inequality Channel of Monetary Transmission

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The Inequality Channel of Monetary Transmission

Author Info

Marta Areosa
Waldyr Areosa

Abstract

We study optimal monetary policy when inequality is present by introducing agents with different productivities, wages, and financial market accesses into a general equilibrium model with sticky prices. Our main results are: (i) There is a channel from interest rate to inflation throughout inequality; (ii) The welfare-based objective of monetary policy includes inequality stabilization; (iii) Higher levels of financial exclusion are associated to bigger welfare losses and to smaller interest rate variability, providing an alternative explanation to why observed interest rate paths are much less volatile than optimal policies implied by most theoretical models of the monetary transmission mechanism.

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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 114.

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Date of creation: Aug 2006
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Handle: RePEc:bcb:wpaper:114

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This paper has been announced in the following NEP Reports:

NEP-ALL-2007-06-02 (All new papers)
NEP-CBA-2007-06-02 (Central Banking)
NEP-MAC-2007-06-02 (Macroeconomics)
NEP-MON-2007-06-02 (Monetary Economics)

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