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Price Stickiness along the Income Distribution and the Effects of Monetary Policy

Author

Listed:
  • Javier Cravino

    (University of Michigan and NBER)

  • Ting Lan

    (University of Michigan)

  • Andrei A. Levchenko

    (University of Michigan, NBER, and CEPR)

Abstract

We document that the prices of the goods consumed by high-income households are more sticky and less volatile than those of the goods consumed by middle-income households. This suggests that monetary shocks can have distributional consequences by affecting the relative prices of the goods consumed at different points on the income distribution. We use a Factor-Augmented VAR (FAVAR) model to show that, following a monetary policy shock, the estimated impulse responses of high-income householdsÕ consumer price indices are 22% lower than those of the middle-income households. We then evaluate the macroeconomic implications of our empirical findings in a quantitative New-Keynesian model featuring households that are heterogeneous in their income and consumption patterns, and sectors that are heterogeneous in their frequency of price changes. We find that: (i) the distributional consequences of monetary policy shocks are large and similar to those in the FAVAR model, and (ii) greater income inequality increases the effectiveness of monetary policy, although this effect is modest for realistic changes in inequality.

Suggested Citation

  • Javier Cravino & Ting Lan & Andrei A. Levchenko, 2018. "Price Stickiness along the Income Distribution and the Effects of Monetary Policy," Working Papers 661, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:661
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; distributional effects; consumption baskets; monetary 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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