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Distributional Considerations for Monetary Policy Strategy

Author

Listed:
  • Laura Feiveson
  • Nils Gornemann
  • Julie L. Hotchkiss
  • Karel Mertens
  • Jae W. Sim

Abstract

We show that makeup strategies, such as average inflation targeting and price-level targeting, can be more effective than a flexible inflation targeting strategy in overcoming the obstacles created by the effective lower bound in a heterogeneous agent New Keynesian (HANK) model. We also show that the macroeconomic stabilization benefits from such alternative strategies can be substantially larger in a HANK environment than in a representative agent New Keynesian model. We argue that gains in employment outcomes from switching to an alternative strategy would generate disproportionate improvements for historically disadvantaged households and thus have potentially long-lasting effects on the economic well-being of these groups.

Suggested Citation

  • Laura Feiveson & Nils Gornemann & Julie L. Hotchkiss & Karel Mertens & Jae W. Sim, 2020. "Distributional Considerations for Monetary Policy Strategy," Finance and Economics Discussion Series 2020-073, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2020-73
    DOI: 10.17016/FEDS.2020.073
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    File URL: https://www.federalreserve.gov/econres/feds/files/2020073pap.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Heterogeneous agent New Keynesian model; Representative agent New Keynesian model; Effective lower bound; Inequality; Hand to mouth; Average inflation targeting; Price-level targeting;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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