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Inequality’s ripple effect: Analyzing its influence on the natural interest rate and monetary policy in Germany, Japan, and the US

Author

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  • Camarero, Mariam
  • Dufrénot, Gilles
  • Tamarit, Cecilio
  • Vaccaro-Grange, Etienne

Abstract

This paper analyzes how different forms of inequality have affected potential growth and the natural interest rate in the U.S., Germany, and Japan during the last two decades. Growing inequalities may constitute a drawback for the recovery of these economies after the Great Recession (GR) and the Covid-19 pandemic. To this aim, we modify the semi-structural model proposed by Holston, Laubach and Williams (2017) by considering the effects of several inequalities. We jointly estimate potential growth and the natural interest rates, showing that the latter can substantially modify the time path of the real interest rate, which prevails when economies are at full strength and inflation is stable. Finally, we study the effects of our estimates on the reaction functions of the monetary authorities.

Suggested Citation

  • Camarero, Mariam & Dufrénot, Gilles & Tamarit, Cecilio & Vaccaro-Grange, Etienne, 2025. "Inequality’s ripple effect: Analyzing its influence on the natural interest rate and monetary policy in Germany, Japan, and the US," Journal of Economic Behavior & Organization, Elsevier, vol. 239(C).
    • Handle: RePEc:eee:jeborg:v:239:y:2025:i:c:s0167268125003166
    DOI: 10.1016/j.jebo.2025.107197
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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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