{
  "title": "Monetary Policy for all? Inequality and the Conduct of Monetary Policy",
  "publication": "IMF Blog, September 30, 2020",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2020/09/30/monetary-policy-for-all-inequality-and-the-conduct-of-monetary-policy",
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  "summary": "Publication: Niels-Jakob Hansen, Alessandro Lin, Rui C. Mano — September 30, 2020",
  "sections": [
    {
      "heading": "Context and research question",
      "content": "- Publication: Niels-Jakob Hansen, Alessandro Lin, Rui C. Mano — September 30, 2020\n- Problem: Inequality in advanced economies and emerging markets has risen in recent decades and has been exacerbated by the COVID-19 pandemic.\n- Central question: What role can the central bank play in addressing inequality given that fiscal policies and structural reforms are already powerful mitigators?"
    },
    {
      "heading": "Theoretical framework and model setup",
      "content": "- Economy: Stylized model where business cycles are driven by innovations in technology.\n- Agent types:\n  - R (rich): owns all capital; income composed of after-tax dividends and wages.\n  - P (poor): receives only wages and a government transfer financed by the dividend tax.\n- Mechanisms highlighted:\n  - Positive productivity shocks raise profits and capital income, thereby exacerbating inequality.\n  - Wages are tech-biased: when productivity rises, R’s share of total wage income goes up while P’s share declines.\n- Empirical consistency: These mechanisms are stated to be consistent with U.S. micro- and macro-economic data and match empirical effects of technology shocks on consumption inequality.\n- Inequality measure used: difference in consumption between rich and poor."
    },
    {
      "heading": "Policy environments analyzed",
      "content": "- Setting 1 — Optimal policy:\n  - Central bank chooses the best possible path of interest rates with full information and cares equally about all individuals.\n- Setting 2 — Taylor rule:\n  - Central bank sets policy according to a Taylor rule prescribing interest rates based on deviations of inflation and output from desired levels; this setting is closer to actual central bank practice."
    },
    {
      "heading": "Key findings — Optimal policy (Setting 1)",
      "content": "- The central bank should place some weight on observed consumption inequality.\n- Policy action: Lower interest rates to stimulate growth and wages, thereby reducing consumption inequality, while tolerating inflation moving above target.\n- Magnitude: The weight on inequality is generally small; output and inflation are not substantially different from those under a policy that ignores inequality.\n- Behavioral shift with higher initial inequality: A central bank pursuing optimal policy cares progressively less about inflation and more about growth the higher the initial level of inequality.\n- Rationale: With higher initial inequality the central bank works harder to stabilize wages and protect the consumption of the poor; stabilizing wages coincides with stabilizing growth."
    },
    {
      "heading": "Key findings — Augmented Taylor rule (Setting 2)",
      "content": "- Recommendation: Augment the Taylor rule to target consumption inequality in addition to output and inflation.\n- Policy action after a positive productivity shock: Set interest rates lower than implied by a standard Taylor rule that targets output and inflation alone.\n- Effects:\n  - Lower interest rates raise wages, benefiting the poor and lowering inequality.\n  - Beyond distributional gains, this policy improves inflation and growth outcomes by avoiding excessive tightening in response to a positive productivity shock."
    },
    {
      "heading": "Overall implications and caveats",
      "content": "- Welfare: Results suggest welfare could be improved if central banks take inequality into account when conducting monetary policy, particularly when following typical interest rate rules.\n- Model specificity: Results are model specific and can be complemented by extensions such as including differentiated types of labor and differentiated wages, or a richer set of available assets.\n- Research agenda: Findings bolster the case for more theoretical and empirical work on the interplay between monetary policy and inequality.\n\nSource: Monetary Policy for all? Inequality and the Conduct of Monetary Policy — Niels-Jakob Hansen, Alessandro Lin, Rui C. Mano, September 30, 2020.\n\n---\n\n\n References\n\n- new IMF staff research\n\nSource: https://www.imf.org/en/blogs/articles/2020/09/30/monetary-policy-for-all-inequality-and-the-conduct-of-monetary-policy"
    }
  ],
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    "[Markdown version](/en/blogs/articles/2020/09/30/monetary-policy-for-all-inequality-and-the-conduct-of-monetary-policy/index.md)",
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    "Authors: Niels-Jakob-Hansen, Alessandro Lin, Rui-Mano",
    "Published: September 30, 2020",
    "Publication: Niels-Jakob Hansen, Alessandro Lin, Rui C. Mano — September 30, 2020",
    "Problem: Inequality in advanced economies and emerging markets has risen in recent decades and has been exacerbated by the COVID-19 pandemic.",
    "Central question: What role can the central bank play in addressing inequality given that fiscal policies and structural reforms are already powerful mitigators?",
    "Economy: Stylized model where business cycles are driven by innovations in technology.",
    "Agent types:",
    "Mechanisms highlighted:",
    "Empirical consistency: These mechanisms are stated to be consistent with U.S. micro- and macro-economic data and match empirical effects of technology shocks on consumption inequality.",
    "Inequality measure used: difference in consumption between rich and poor.",
    "Setting 1 — Optimal policy:",
    "Setting 2 — Taylor rule:",
    "The central bank should place some weight on observed consumption inequality.",
    "Policy action: Lower interest rates to stimulate growth and wages, thereby reducing consumption inequality, while tolerating inflation moving above target.",
    "Magnitude: The weight on inequality is generally small; output and inflation are not substantially different from those under a policy that ignores inequality.",
    "Behavioral shift with higher initial inequality: A central bank pursuing optimal policy cares progressively less about inflation and more about growth the higher the initial level of inequality.",
    "Rationale: With higher initial inequality the central bank works harder to stabilize wages and protect the consumption of the poor; stabilizing wages coincides with stabilizing growth.",
    "Recommendation: Augment the Taylor rule to target consumption inequality in addition to output and inflation.",
    "Policy action after a positive productivity shock: Set interest rates lower than implied by a standard Taylor rule that targets output and inflation alone.",
    "Effects:",
    "Welfare: Results suggest welfare could be improved if central banks take inequality into account when conducting monetary policy, particularly when following typical interest rate rules.",
    "Model specificity: Results are model specific and can be complemented by extensions such as including differentiated types of labor and differentiated wages, or a richer set of available assets.",
    "Research agenda: Findings bolster the case for more theoretical and empirical work on the interplay between monetary policy and inequality.",
    "[new IMF staff research](https://www.imf.org/en/Publications/WP/Issues/2020/09/25/Should-Inequality-Factor-into-Central-Banks-Decisions-49756)"
  ],
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