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Inequality-Constrained Monetary Policy in a Financialized Economy

Author

Listed:
  • Luca Eduardo Fierro

    (Institute of Economics, Scuola Superiore Sant’Anna Pisa, Italy)

  • Federico Giri

    (Department of Economics and Social Sciences, Università Politecnica delle Marche, Ancona, Italy)

  • Alberto Russo

    (Department of Economics and Social Sciences, Università Politecnica delle Marche, Ancona, Italy and Department of Economics, Universitat Jaume I, Castellón, Spain)

Abstract

We study how income inequality affects monetary policy through the inequalityhousehold debt channel. We design a minimal macro Agent-Based model that replicates several stylized facts, including two novel ones: falling aggregate saving rate and decreasing bankruptcies during the household’s debt boom phase. When inequality meets financial liberalization, a leaning against-the-wind strategy can preserve financial stability at the cost of high unemployment, whereas an accommodative strategy can dampen the fall of aggregate demand at the cost of larger leverage. We conclude that inequality may constrain the central bank, even when it is not explicitly targeted.

Suggested Citation

  • Luca Eduardo Fierro & Federico Giri & Alberto Russo, 2023. "Inequality-Constrained Monetary Policy in a Financialized Economy," Working Papers 2023/02, Economics Department, Universitat Jaume I, Castellón (Spain).
    • Handle: RePEc:jau:wpaper:2023/02
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    More about this item

    Keywords

    Inequality; Financial Fragility; Monetary Policy; Agent-Based Model.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • 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
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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