IDEAS home Printed from https://ideas.repec.org/a/red/issued/25-146.html

Household Income Inequality and Optimal Trend Inflation

Author

Listed:
  • Jonsoo Kim

    (Yonsei University)

  • Daeha Cho

    (Hanyang University)

  • Kwang Hwan Kim

    (Yonsei University)

Abstract

This paper studies the optimal inflation target in a tractable heterogeneous agent New Keynesian (THANK) model with an occasionally binding zero lower bound, incorporating income inequality, income risk, and countercyclical fiscal policy. We analytically characterize how cyclical and long-run inequality, income risk, and fiscal policy shape the welfare trade-off of trend inflation across households. Greater cyclical inequality and income risk increase the marginal benefits of inflation, especially for hand-to-mouth (HtM) households, while long-run inequality reduces marginal benefits. Quantitatively, income inequality and income risk modestly raise the utilitarian optimal inflation rate relative to the representative agent benchmark. We further show that countercyclical fiscal policies lower the marginal benefit of inflation for all households and reduce the optimal inflation target. Finally, adding wealth inequality in the form of private or government debt, in addition to income inequality, raises the optimal inflation target. (Copyright: Elsevier)

Suggested Citation

  • Jonsoo Kim & Daeha Cho & Kwang Hwan Kim, 2026. "Household Income Inequality and Optimal Trend Inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 61, August.
    • Handle: RePEc:red:issued:25-146
    DOI: 10.1016/j.red.2026.101350
    as

    Download full text from publisher

    File URL: https://dx.doi.org/10.1016/j.red.2026.101350
    Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and institutional members. See https://www.sciencedirect.com/ for details.
    File URL: https://libkey.io/10.1016/j.red.2026.101350?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:issued:25-146. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.