Price Stickiness along the Income Distribution and the Effects of Monetary Policy

Javier Cravino, Ting Lan and Andrei Levchenko
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Ting Lan: University of Michigan

No 661, Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: We document that the prices of the goods consumed by high-income households are more sticky and less volatile than those of the goods consumed by middle-income households. This suggests that monetary shocks can have distributional consequences by affecting the relative prices of the goods consumed at different points on the income distribution. We use a Factor-Augmented VAR (FAVAR) model to show that, following a monetary policy shock, the estimated impulse responses of high-income householdsÕ consumer price indices are 22% lower than those of the middle-income households. We then evaluate the macroeconomic implications of our empirical findings in a quantitative New-Keynesian model featuring households that are heterogeneous in their income and consumption patterns, and sectors that are heterogeneous in their frequency of price changes. We find that: (i) the distributional consequences of monetary policy shocks are large and similar to those in the FAVAR model, and (ii) greater income inequality increases the effectiveness of monetary policy, although this effect is modest for realistic changes in inequality.

Keywords: Inflation; distributional effects; consumption baskets; monetary policy. (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2018-04
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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http://www.fordschool.umich.edu/rsie/workingpapers/Papers651-675/r661.pdf

Related works:
Journal Article: Price stickiness along the income distribution and the effects of monetary policy (2020)
Working Paper: Price stickiness along the income distribution and the effects of monetary policy (2018)
Working Paper: Price Stickiness along the Income Distribution and the Effects of Monetary Policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:mie:wpaper:661

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