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How Would Monetary Policy Look Like if John Rawls Had Been Hired as a Chairman of the Fed?

Listed author(s):
  • Marta B. M. Areosa
  • Waldyr D. Areosa
  • Pierre Monnin

Using a textbook New Keynesian model extended with an inequality channel, we examine optimal monetary policy departing from the traditional utilitarian social welfare function, to consider alternative functions, including the Rawlsian approach of putting only weight to the agent with the lowest welfare level. Our main results show the optimal responses from a Rawlsian monetary authority are: (i) a less aggressive monetary tightening, but inducing a more pronounced drop in inflation after a monetary shock; (ii) a monetary policy easing after an increase in government spending and (iii) a more pronounced drop in the interest rate after a positive total factor productivity shock.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps447.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 447.

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Date of creation: Dec 2016
Handle: RePEc:bcb:wpaper:447
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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