Interaction between monetary policy and income inequality in a deposits market
The paper studies the impact of income inequality on the monetary policy and the feedback, in a partial equilibrium framework. Wealth differences of depositors play crucial role in determining aggregate deposits, available for loans. Non-homothetic structure of depositors' return function makes distribution of deposits relevant for the aggregate. Unequal distribution of resources leads to a lower (deposit) price elasticity for the rich relative to the poor, and this results in higher markups and lower level of collected total deposits. Interaction between monetary policy and income inequality leads the following results: (i) higher inequality reduces the power of monetary policy in terms of depositors' responsiveness to the policy changes and (ii) expansionary (contractionary) monetary policy increases (decreases) savings differences. The model provides a new source of financial friction, relevant for economies with high income inequality.
|Date of creation:||30 Jul 2011|
|Date of revision:||2012|
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