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Monetary Policy and Inequality in Mexico

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  • Villarreal, Francisco G.

Abstract

Despite growing interest regarding the distributive impact of macroeconomic policies, the relationship between monetary policy and inequality has received relatively little attention in the literature. This is partly explained by the fact that the workhorse model used for monetary policy analysis summarises the demand-side of the economy by means of a representative agent, whose welfare is the normative criterion of optimal policy. However, alternative formulations using incomplete market models which feature heterogeneous agents, indicate that monetary policy does have an effect on the distribution of income, consumption and wealth, which potentially has implications for the design and conduct of optimal policy. The document empirically investigates the nature of the relationship between monetary policy and household income inequality in Mexico. The ultimate purpose is to uncover certain regularities which characterise the relationship, which can eventually serve as stylised facts for the design of theoretical models. The response of household's income inequality, and its components, to monetary policy shocks indicate that unanticipated increases in the nominal interest rate are correlated with a reduction of household income inequality in the short run, and that the effect dissipates over a two-year horizon. The results are robust to the particular measure of inequality used, as well as the procedure used to identify the policy shocks.

Suggested Citation

  • Villarreal, Francisco G., 2014. "Monetary Policy and Inequality in Mexico," MPRA Paper 57074, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:57074
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:ecmode:v:65:y:2017:i:c:p:106-118 is not listed on IDEAS
    2. Villarreal, Francisco G., 2016. "Monetary policy and inequality under household heterogeneity and incomplete markets," MPRA Paper 82780, University Library of Munich, Germany.
    3. repec:eee:moneco:v:88:y:2017:i:c:p:70-89 is not listed on IDEAS
    4. Karen Davtyan, 2016. "“Income Inequality and Monetary Policy: An Analysis on the Long Run Relation”," AQR Working Papers 201604, University of Barcelona, Regional Quantitative Analysis Group, revised Apr 2016.
    5. Karen Davtyan, 2016. "“Income Inequality and Monetary Policy: An analysis on the Long Run Relation”," IREA Working Papers 201604, University of Barcelona, Research Institute of Applied Economics, revised Apr 2016.

    More about this item

    Keywords

    Monetary Policy; Income Distribution; Small Open Economy;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • D3 - Microeconomics - - Distribution
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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