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Heterogeneity and monetary policy

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  • Nurlan Turdaliev

    (University of Windsor)

Abstract

In a simple environment with heterogeneous agents, we demonstrate that the central bank delivers a higher inflation rate than when population is homogeneous. This tendency to choose a higher level of inflation than efficiency dictates is due to the efficiency-vs-equity trade-off that the central bank faces in this heterogeneous economy: up to a certain level, inflation decreases inequality. Optimal delegation involves appointing a central bank that puts a higher weight on the utility of the high-productivity workers than society does. This effect of delegation that improves the macroeconomic outcome disappears as homogeneity is restored. However, the inflation level under optimal delegation does not reach the efficiency level.

Suggested Citation

  • Nurlan Turdaliev, 2019. "Heterogeneity and monetary policy," Journal of Economics, Springer, vol. 128(2), pages 119-145, October.
    • Handle: RePEc:kap:jeczfn:v:128:y:2019:i:2:d:10.1007_s00712-018-0649-6
    DOI: 10.1007/s00712-018-0649-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary policy; Heterogeneity; Central bank; Inflation; Inequality;
    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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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