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The Inequality Channel of Monetary Transmission

  • Marta Areosa
  • Waldyr Areosa

We study optimal monetary policy when inequality is present by introducing agents with different productivities, wages, and financial market accesses into a general equilibrium model with sticky prices. Our main results are: (i) There is a channel from interest rate to inflation throughout inequality; (ii) The welfare-based objective of monetary policy includes inequality stabilization; (iii) Higher levels of financial exclusion are associated to bigger welfare losses and to smaller interest rate variability, providing an alternative explanation to why observed interest rate paths are much less volatile than optimal policies implied by most theoretical models of the monetary transmission mechanism.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps114.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 114.

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Date of creation: Aug 2006
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Handle: RePEc:bcb:wpaper:114
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