Working Paper（22-006E）A benefit of monetary policy response to inequality

The main objective of this paper is to investigate a monetary policy response to inequality in a Two-Agent New Keynesian (TANK) model with hand-to-mouth households. I derive the analytical condition for equilibrium determinacy and show that a monetary policy response to inequality is helpful in achieving equilibrium de terminacy. On the other hand, the impulse responses to structural shocks show that a monetary policy response to inequality does not necessarily reduce the volatilities of both inflation and output although it mitigates the volatility of inequality.

Keywords: Inequality; monetary policy; TANK; hand-to-mouth; equilibrium in determinacy

JEL classifications: E25; E31; E32; E52; E58