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Gini in the Taylor Rule: Should the Fed Care About Inequality?

Author

Listed:
  • Eunseong Ma

    (Yonsei University)

  • Kwangyong Park

    (Bank of Korea)

Abstract
This study investigates whether the Federal Reserve (Fed) should care about inequality. We develop a Heterogeneous Agent New Keynesian (HANK) model, which generates empirically realistic inequalities and business cycle properties observed in the U.S. data. We consider the income Gini coefficient in a monetary policy rule to see how an inequality-targeting monetary policy affects aggregate and disaggregate outcomes, as well as economic welfare. We find that a monetary policy rule with an explicit inequality target can be welfare improving, even if inequality becomes volatile. In particular, the policy reform can improve the welfare of the poorest the most. Finally, we demonstrate the feasibility of a subgroup targeting monetary policy as a tool for an implementable inclusive monetary policy.

Suggested Citation

  • Eunseong Ma & Kwangyong Park, 2022. "Gini in the Taylor Rule: Should the Fed Care About Inequality?," Working papers 2022rwp-200, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2022rwp-200
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    Cited by:

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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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