IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/31282.html
   My bibliography  Save this paper

Inequality and the Zero Lower Bound

Author

Listed:
  • Jesús Fernández-Villaverde
  • Joël Marbet
  • Galo Nuño
  • Omar Rachedi

Abstract

This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households' precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality.

Suggested Citation

  • Jesús Fernández-Villaverde & Joël Marbet & Galo Nuño & Omar Rachedi, 2023. "Inequality and the Zero Lower Bound," NBER Working Papers 31282, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31282
    Note: EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w31282.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mumtaz, Haroon & Theophilopoulou, Angeliki, 2017. "The impact of monetary policy on inequality in the UK. An empirical analysis," European Economic Review, Elsevier, vol. 98(C), pages 410-423.
    2. Veronica Guerrieri & Guido Lorenzoni, 2017. "Credit Crises, Precautionary Savings, and the Liquidity Trap," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(3), pages 1427-1467.
    3. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    4. Anton Nakov, 2008. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 73-127, June.
    5. Bilbiie, Florin O., 2008. "Limited asset markets participation, monetary policy and (inverted) aggregate demand logic," Journal of Economic Theory, Elsevier, vol. 140(1), pages 162-196, May.
    6. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-1044, December.
    7. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(4), pages 1371-1406.
    8. Bianchi, Francesco & Melosi, Leonardo & Rottner, Matthias, 2021. "Hitting the elusive inflation target," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 107-122.
    9. Adrien Auclert & Bence Bardóczy & Matthew Rognlie & Ludwig Straub, 2021. "Using the Sequence‐Space Jacobian to Solve and Estimate Heterogeneous‐Agent Models," Econometrica, Econometric Society, vol. 89(5), pages 2375-2408, September.
    10. Kurt Mitman & Iourii Manovskii & Marcus Hagedorn, 2017. "The Fiscal Multiplier," 2017 Meeting Papers 1383, Society for Economic Dynamics.
    11. Carvalho, Carlos & Ferrero, Andrea & Nechio, Fernanda, 2016. "Demographics and real interest rates: Inspecting the mechanism," European Economic Review, Elsevier, vol. 88(C), pages 208-226.
    12. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, American Economic Association, vol. 108(3), pages 697-743, March.
    13. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-1014, December.
    14. Guido Ascari, 2004. "Staggered Prices and Trend Inflation: Some Nuisances," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 642-667, July.
    15. Nicolas Coeurdacier & Helene Rey & Pablo Winant, 2011. "The Risky Steady State," American Economic Review, American Economic Association, vol. 101(3), pages 398-401, May.
    16. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    17. Hills, Timothy S. & Nakata, Taisuke & Schmidt, Sebastian, 2019. "Effective lower bound risk," European Economic Review, Elsevier, vol. 120(C).
    18. Marlon Azinovic & Luca Gaegauf & Simon Scheidegger, 2022. "Deep Equilibrium Nets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1471-1525, November.
    19. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2013. "Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 1-56.
    20. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    21. Jonathan A. Parker & Nicholas S. Souleles & David S. Johnson & Robert McClelland, 2013. "Consumer Spending and the Economic Stimulus Payments of 2008," American Economic Review, American Economic Association, vol. 103(6), pages 2530-2553, October.
    22. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    23. Jesús Fernández‐Villaverde & Samuel Hurtado & Galo Nuño, 2023. "Financial Frictions and the Wealth Distribution," Econometrica, Econometric Society, vol. 91(3), pages 869-901, May.
    24. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(4), pages 1371-1406.
    25. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
    26. Christian Bayer & Ralph Luetticke & Lien Pham‐Dao & Volker Tjaden, 2019. "Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk," Econometrica, Econometric Society, vol. 87(1), pages 255-290, January.
    27. Alisdair McKay & Emi Nakamura & Jón Steinsson, 2016. "The Power of Forward Guidance Revisited," American Economic Review, American Economic Association, vol. 106(10), pages 3133-3158, October.
    28. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    29. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    30. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    31. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(3), pages 1469-1513.
    32. Yunus Aksoy & Henrique S. Basso & Ron P. Smith & Tobias Grasl, 2019. "Demographic Structure and Macroeconomic Trends," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 193-222, January.
    33. SeHyoun Ahn & Greg Kaplan & Benjamin Moll & Thomas Winberry & Christian Wolf, 2018. "When Inequality Matters for Macro and Macro Matters for Inequality," NBER Macroeconomics Annual, University of Chicago Press, vol. 32(1), pages 1-75.
    34. Jesús Fernández-Villaverde & Pablo Guerrón-Quintana & Keith Kuester & Juan Rubio-Ramírez, 2015. "Fiscal Volatility Shocks and Economic Activity," American Economic Review, American Economic Association, vol. 105(11), pages 3352-3384, November.
    35. Gabriele Fiorentini & Alessandro Galesi & Gabriel Pérez-Quirós & Enrique Sentana, 2018. "The rise and fall of the natural interest rate," Working Papers 1822, Banco de España.
    36. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 679-739, September.
    37. Alisdair McKay & Ricardo Reis, 2016. "The Role of Automatic Stabilizers in the U.S. Business Cycle," Econometrica, Econometric Society, vol. 84, pages 141-194, January.
    38. Marc Dordal i Carreras & Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2016. "Infrequent but Long-Lived Zero Lower Bound Episodes and the Optimal Rate of Inflation," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 497-520, October.
    39. Marco Del Negro & Domenico Giannone & Marc P. Giannoni & Andrea Tambalotti, 2017. "Safety, Liquidity, and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 235-316.
    40. Nicolas Coeurdacier & Hélène Rey & Pablo Winant, 2011. "The risky steady state," SciencePo Working papers hal-00972801, HAL.
    41. Broda, Christian & Parker, Jonathan A., 2014. "The Economic Stimulus Payments of 2008 and the aggregate demand for consumption," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 20-36.
    42. Young, Eric R., 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm and non-stochastic simulations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 36-41, January.
    43. Coibion, Olivier & Gorodnichenko, Yuriy & Kueng, Lorenz & Silvia, John, 2017. "Innocent Bystanders? Monetary policy and inequality," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 70-89.
    44. Marc Dordal-i-Carreras & Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2016. "Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation," NBER Working Papers 22510, National Bureau of Economic Research, Inc.
    45. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(1 (Spring), pages 77-153.
    46. Philippe Andrade & Jordi Gali & Herve Le Bihan & Julien Matheron, 2019. "The Optimal Inflation Target and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(2 (Fall)), pages 173-255.
    47. Gorodnichenko, Yuriy & Maliar, Serguei & Naubert, Christopher, 2020. "Household Savings and Monetary Policy under Individual and Aggregate Stochastic Volatility," CEPR Discussion Papers 15614, C.E.P.R. Discussion Papers.
    48. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
    49. Fernández-Villaverde, Jesús & Gordon, Grey & Guerrón-Quintana, Pablo & Rubio-Ramírez, Juan F., 2015. "Nonlinear adventures at the zero lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 182-204.
    50. Francesco Bianchi & Martin Lettau & Sydney C. Ludvigson, 2022. "Monetary Policy and Asset Valuation," Journal of Finance, American Finance Association, vol. 77(2), pages 967-1017, April.
    51. Adam, Klaus & Billi, Roberto M., 2007. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 728-752, April.
    52. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 77-153.
    53. Bilbiie, Florin O. & Känzig, Diego R. & Surico, Paolo, 2022. "Capital and income inequality: An aggregate-demand complementarity," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 154-169.
    54. Maliar, Lilia & Maliar, Serguei & Valli, Fernando, 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 42-49, January.
    55. Adrien Auclert & Bence Bardóczy & Matthew Rognlie, 2023. "MPCs, MPEs, and Multipliers: A Trilemma for New Keynesian Models," The Review of Economics and Statistics, MIT Press, vol. 105(3), pages 700-712, May.
    56. Jiequn Han & Yucheng Yang & Weinan E, 2021. "DeepHAM: A Global Solution Method for Heterogeneous Agent Models with Aggregate Shocks," Papers 2112.14377, arXiv.org, revised Feb 2022.
    57. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g704ld0h3 is not listed on IDEAS
    58. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
    59. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g704ld0h3 is not listed on IDEAS
    60. Christina Patterson, 2023. "The Matching Multiplier and the Amplification of Recessions," American Economic Review, American Economic Association, vol. 113(4), pages 982-1012, April.
    61. Maliar, Lilia & Maliar, Serguei & Winant, Pablo, 2021. "Deep learning for solving dynamic economic models," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 76-101.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Oh, Joonseok & Picco, Anna Rogantini, 2024. "Macro uncertainty, unemployment risk, and consumption dynamics," Working Paper Series 2971, European Central Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    2. Kase, Hanno & Melosi, Leonardo & Rottner, Matthias, 2024. "Estimating Nonlinear Heterogeneous Agent Models with Neural Networks," The Warwick Economics Research Paper Series (TWERPS) 1499, University of Warwick, Department of Economics.
    3. Bilbiie, Florin O., 2020. "The New Keynesian cross," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 90-108.
    4. Bilbiie, Florin O. & Känzig, Diego R. & Surico, Paolo, 2022. "Capital and income inequality: An aggregate-demand complementarity," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 154-169.
    5. Adrien Auclert & Ludwig Straub & Matthew Rognlie, 2019. "Micro Jumps, Macro Humps: monetary policy and business cycles in an estimated HANK model," 2019 Meeting Papers 1449, Society for Economic Dynamics.
    6. Ralph Luetticke, 2021. "Transmission of Monetary Policy with Heterogeneity in Household Portfolios," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 1-25, April.
    7. Alisdair McKay & Emi Nakamura & Jón Steinsson, 2016. "The Power of Forward Guidance Revisited," American Economic Review, American Economic Association, vol. 106(10), pages 3133-3158, October.
    8. Bianchi, Francesco & Melosi, Leonardo & Rottner, Matthias, 2021. "Hitting the elusive inflation target," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 107-122.
    9. Dobrew, Michael & Gerke, Rafael & Giesen, Sebastian & Röttger, Joost, 2023. "Make-up strategies with incomplete markets and bounded rationality," Discussion Papers 01/2023, Deutsche Bundesbank.
    10. Bayer, Christian & Born, Benjamin & Luetticke, Ralph, 2023. "The liquidity channel of fiscal policy," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 86-117.
    11. Kurt Mitman & Iourii Manovskii & Marcus Hagedorn, 2017. "The Fiscal Multiplier," 2017 Meeting Papers 1383, Society for Economic Dynamics.
    12. Jordi Galí, 2018. "The State of New Keynesian Economics: A Partial Assessment," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 87-112, Summer.
    13. Francesco Ferlaino, 2024. "Does the financial accelerator accelerate inequalities?," Working Papers 538, University of Milano-Bicocca, Department of Economics.
    14. Alisdair McKay & Johannes F. Wieland, 2021. "Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy," Econometrica, Econometric Society, vol. 89(6), pages 2717-2749, November.
    15. Bilbiie, F. & Primiceri, G. E. & Tambalotti, A., 2022. "Inequality and Business Cycles," Janeway Institute Working Papers 2234, Faculty of Economics, University of Cambridge.
    16. Sandra Daudignon & Oreste Tristani, 2022. "Monetary policy and the drifting natural rate of interest," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 22/1057, Ghent University, Faculty of Economics and Business Administration.
    17. Matthew Rognlie & Adrien Auclert, 2016. "Inequality and Aggregate Demand," 2016 Meeting Papers 1353, Society for Economic Dynamics.
    18. Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Truger, Achim & Wieland, Volker, 2019. "Den Strukturwandel meistern. Jahresgutachten 2019/20 [Dealing with Structural Change. Annual Report 2019/20]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201920.
    19. Florin Bilbiie & Xavier Ragot, 2021. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 71-95, July.
    20. Hong, Seungki, 2023. "MPCs in an emerging economy: Evidence from Peru," Journal of International Economics, Elsevier, vol. 140(C).

    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:31282. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.