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Interaction between monetary policy and income inequality in a deposits market

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  • Grigoryan, Aleksandr
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    Abstract

    The paper studies the impact of income inequality on the monetary policy and the feedback, in a partial equilibrium framework. Wealth differences of depositors play crucial role in determining aggregate deposits, available for loans. Non-homothetic structure of depositors' return function makes distribution of deposits relevant for the aggregate. Unequal distribution of resources leads to a lower (deposit) price elasticity for the rich relative to the poor, and this results in higher markups and lower level of collected total deposits. Interaction between monetary policy and income inequality leads the following results: (i) higher inequality reduces the power of monetary policy in terms of depositors' responsiveness to the policy changes and (ii) expansionary (contractionary) monetary policy increases (decreases) savings differences. The model provides a new source of financial friction, relevant for economies with high income inequality.

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    File URL: http://mpra.ub.uni-muenchen.de/43555/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43555.

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    Date of creation: 30 Jul 2011
    Date of revision: 2012
    Handle: RePEc:pra:mprapa:43555

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    Related research

    Keywords: Deposit holdings inequality; non-homothetic technologies; monetary policy;

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    1. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
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