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Heterogeneity and the Equitable Rate of Interest

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  • Riccardo Masolo

    (Università Cattolica del Sacro Cuore
    Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)

Abstract

The equitable rate of interest represents a benchmark to evaluate the cross-sectional effects of monetary policy. I define it as the real rate of interest that minimizes the welfare losses associated to cross-sectional heterogeneity, under flexible prices. In a large class of models, it can be expressed as the payoff of a suitably chosen portfolio. In a Two-Agent New Keynesian model the deviations of the optimal policy prescription, relative to a Representative-Agent benchmark, can be traced back to the equitable rate gap: the difference between prevailing real rates and the equitable rate. This parallels the way in which the natural rate is the reference stick to evaluate the stance of monetary policy with regards to aggregate stabilization. Indeed, the difference between the natural rate and the equitable rate marks the tradeoff between aggregate and cross-sectional stabilization, faced by a welfare-maximizing policymaker.

Suggested Citation

  • Riccardo Masolo, 2023. "Heterogeneity and the Equitable Rate of Interest," DISCE - Working Papers del Dipartimento di Economia e Finanza def128, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    • Handle: RePEc:ctc:serie1:def128
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    File URL: http://dipartimenti.unicatt.it/economia-finanza-def128.pdf
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    References listed on IDEAS

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    Cited by:

    1. Russell Davidson & Andrea Monticini, 2023. "Bootstrap Performance with Heteroskedasticity," DISCE - Working Papers del Dipartimento di Economia e Finanza def130, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    2. Valentina Colombo & Alessia Paccagnini, 2024. "Uncertainty and the Federal Reserve’s Balance Sheet Monetary Policy," DISCE - Working Papers del Dipartimento di Economia e Finanza def131, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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    More about this item

    Keywords

    Monetary Policy; Heterogeneous Agents; Optimal Policy.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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