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The Inequality Channel of Monetary Transmission

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  • 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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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps114.pdf
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Bibliographic Info

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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Web page: http://www.bcb.gov.br/?english

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References

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  1. Arnildo da Silva Correa & Ronald Otto Hillbrecht, 2003. "Ciclos Internacionais de Negócios: uma Análise de Mudança de Regime Markoviano para Brasil, Argentina e Estados Unidos," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] b47, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  2. Ryan A. Compton & Jose Ricardo da Costa e Silva, 2005. "Finance and the Business Cycle: a Kalman Filter Approach with Markov Switching," Working Papers Series 97, Central Bank of Brazil, Research Department.
  3. André Soares Loureiro & Fernando de Holanda Barbosa, 2004. "Risk Premia for Emerging Markets Bonds: Evidence from Brazilian Government Debt, 1996-2002," Working Papers Series 85, Central Bank of Brazil, Research Department.
  4. Eduardo A. S. Rodrigues & Victorio Chu & Leonardo S. Alencar & Tony Takeda, 2006. "O Efeito da Consignação em Folha nas Taxas de Juros dos Empréstimos Pessoais," Working Papers Series 108, Central Bank of Brazil, Research Department.
  5. Aloisio Araujo & Marcia Leon, 2004. "Speculative Attacks on Debts and Optimum Currency Area: A Welfare Analysis," Working Papers Series 84, Central Bank of Brazil, Research Department.
  6. Pedro H. Albuquerque, 2000. "An Information Theory Approach to the Aggregation of Log-Linear Models," Working Papers Series 4, Central Bank of Brazil, Research Department.
  7. Jim Dolmas & Gregory W. Huffman & Mark A. Wynne, 2000. "Inequality, inflation, and central bank independence," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 271-287, February.
  8. Araújo, Aloísio Pessoa de & Leon, Márcia Saraiva, 2002. "Speculative Attacks on Debts, Dollarization and Optimum Currency Areas," Economics Working Papers (Ensaios Economicos da EPGE) 446, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  9. Maurício S. Bugarin & Fabia A. de Carvalho, 2005. "Comment on Market Discipline and Monetary Policy by Carl Walsh," Working Papers Series 95, Central Bank of Brazil, Research Department.
  10. Alan Cosme Rodrigues da Silva & João Maurício de Souza Moreira & Myriam Beatriz Eiras das Neves, 2006. "Avaliação de Modelos de Exigência de Capital para Risco de Mercado do Cupom Cambial," Working Papers Series 111, Central Bank of Brazil, Research Department.
  11. Sergio R.S. Souza & Benjamin M. Tabak & Daniel O. Cajueiro, 2006. "Investigação da Memória de Longo Prazo na Taxa de Câmbio no Brasil," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 60(2), pages 193-209, November.
  12. Benjamin Miranda Tabak & Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
  13. José Fajardo & Aquiles Farias, 2002. "Generalized Hyperbolic Distributions and Brazilian Data," Working Papers Series 52, Central Bank of Brazil, Research Department.
  14. Marcelo Kfoury Muinhos & Sergio Afonso Lago Alves, 2003. "Medium-Size Macroeconomic Model for the Brazilian Economy," Working Papers Series 64, Central Bank of Brazil, Research Department.
  15. Márcio I. Nakane & Leonardo S. Alencar & Fabio Kanczuk, 2006. "Demand for Bank Services and Market Power in Brazilian Banking," Working Papers Series 107, Central Bank of Brazil, Research Department.
  16. Eduardo Lundberg, 2000. "Monetary Policy and Banking Supervision Functions on the Central Bank," Working Papers Series 2, Central Bank of Brazil, Research Department.
  17. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
  18. John Landon-Lane & Filippo Occhino, 2005. "Estimation and Evaluation of a Segmented Markets Monetary Model," Departmental Working Papers 200505, Rutgers University, Department of Economics.
  19. Ana M. Aizcorbe & Arthur B. Kennickell & Kevin B. Moore, 2003. "Recent changes in U.S. family finances: evidence from the 1998 and 2001 Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-32.
  20. Arnildo da Silva Correa, 2003. "Diferenças e Semelhanças entre Países da América Latina: Uma Análise de Markov Switching para os Ciclos Econômicos de Brasil e Argentina," Working Papers Series 80, Central Bank of Brazil, Research Department.
  21. Ricardo Schechtman & Valéria Salomão Garcia & Sergio Mikio Koyama & Guilherme Cronemberger Parente, 2004. "Credit Risk Measurement and the Regulation of Bank Capital and Provision Requirements in Brazil - A Corporate Analysis," Working Papers Series 91, Central Bank of Brazil, Research Department.
  22. Thomas Y. Wu, 2004. "Does Inflation Targeting Reduce Inflation? An Analysis for the OECD Industrial Countries," Working Papers Series 83, Central Bank of Brazil, Research Department.
  23. Alexandre A. Tombini & Sergio A. Lago Alves, 2006. "The Recent Brazilian Disinflation Process and Costs," Working Papers Series 109, Central Bank of Brazil, Research Department.
  24. Marcelle Chauvet, 2000. "Leading Indicators of Inflation for Brazil," Working Papers Series 7, Central Bank of Brazil, Research Department.
  25. Francisco Marcos R. Figueiredo & Thaís Porto Ferreira, 2002. "Os Preços Administrados e a Inflação no Brasil," Working Papers Series 59, Central Bank of Brazil, Research Department.
  26. Emanuel-Werner Kohlscheen, 2000. "Estimating Exchange Market Pressure and Intervention Activity," Working Papers Series 9, Central Bank of Brazil, Research Department.
  27. Sergio A. L. Alves & Waldyr D. Areosa, 2005. "Targets and Inflation Dynamics," Working Papers Series 100, Central Bank of Brazil, Research Department.
  28. Eui Jung Chang & Marcelo Kfoury Muinhos & Joanílio Rodolpho Teixeira, 2002. "Macroeconomic Coordination and Inflation Targeting in a Two-Country Model," Working Papers Series 50, Central Bank of Brazil, Research Department.
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Citations

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Cited by:
  1. Flávia Mourão Graminho, 2006. "A Neoclassical Analysis of the Brazilian "Lost-Decades"," Working Papers Series 123, Central Bank of Brazil, Research Department.
  2. Sergio Rubens Stancato de Souza & Benjamin M. Tabak & Daniel O. Cajueiro, 2007. "Long-Range Dependence in Exchange Rates: the case of the European Monetary System," Working Papers Series 131, Central Bank of Brazil, Research Department.
  3. Arnildo da Silva Correa & André Minella, 2010. "Nonlinear mechanisms of the exchange rate pass-through: A Phillips curve model with threshold for Brazil," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 64(3), pages 231-243, September.
  4. Jaqueline Terra Moura Marins & Eduardo Saliby & Joséte Florencio do Santos, 2006. "Out-Of-The_Money Monte Carlo Simulation Option Pricing: the join use of Importance Sampling and Descriptive Sampling," Working Papers Series 116, Central Bank of Brazil, Research Department.
  5. Solange Gouvea, 2007. "Price Rigidity in Brazil: Evidence from CPI Micro Data," Working Papers Series 143, Central Bank of Brazil, Research Department.
  6. Benjamin M. Tabak, 2006. "The Dynamic Relationship between Stock Prices and Exchange Rates: evidence for Brazil," Working Papers Series 124, Central Bank of Brazil, Research Department.
  7. Barbara Alemanni & José Renato Haas Ornelas, 2006. "Herding Behavior by Equity Foreign Investors on Emerging Markets," Working Papers Series 125, Central Bank of Brazil, Research Department.
  8. Aloísio P. Araújo & José Valentim M. Vicente, 2006. "Contagion, Bankruptcy and Social Welfare Analysis in a Financial Economy with Risk Regulation Constraint," Working Papers Series 118, Central Bank of Brazil, Research Department.
  9. Ricardo Schechtman, 2007. "Joint Validation of Credit Rating PDs under Default Correlation," Working Papers Series 149, Central Bank of Brazil, Research Department.
  10. Gilneu F. A. Vivan & Benjamin M. Tabak, 2007. "A New Proposal for Collection and Generation of Information on Financial Institutions' Risk: the case of derivatives," Working Papers Series 133, Central Bank of Brazil, Research Department.
  11. Marcelo Y. Takami & Benjamin M. Tabak, 2007. "Evaluation of Default Risk for The Brazilian Banking Sector," Working Papers Series 135, Central Bank of Brazil, Research Department.

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