Question

Based from the Abstract and conclusion, please give comments and key points of the article entitled “Computational evidence on the distributive properties of monetary policy.”

Abstract

Empirical studies have pointed out that monetary policy may significantly affect income and wealth inequality. To investigate the distributive properties of monetary policy the authors resort to an agent-based macroeconomic model where firms, households and one bank interact on the basis of limited information and adaptive rules-of-thumb. Simulations show that the model can replicate fairly well a number of stylized facts, especially those relative to the business cycle. The authors address the issue using three types of computational experiments, including a global sensitivity analysis carried out through a novel methodology which greatly reduces the computational burden of simulations. The result emerges that a more restrictive monetary policy increases inequality, even though this effect may differ across groups of households. In addition, it appears to be attenuated if the bank’s willingness to lend is lower. The overall analysis suggests that inequality can constitute valuable information also for central banks.

Conclusion

Recent empirical studies have pointed out that monetary policy may significantly affect income and wealth inequality through several channels. This influence is exerted not only because monetary policy can affect different income sources in different ways, but also because households are heterogeneous with regards to the relative size of their income sources. Despite its relevance, this subject has gone relatively ignored by economic theory, mainly because the use of representative agents makes mainstream models inadequate to assess distributions and inequality (with the recent exception of the HANK models). To properly investigate the distributive properties of monetary policy, therefore, in this paper we resort to agent-based techniques in which agents’ heterogeneity plays a fundamental role. The theoretical framework we set up is an agent-based macroeconomic model where firms, households and one bank interact on the basis of limited information and adaptive rules-of-thumb. Simulations show that the model is able to replicate fairly well a number of stylized facts, especially those relative to the business cycle. Subsequently, we employ the model as a computational laboratory through which we can simulate changes in monetary policy and assess their influence on income and wealth inequality. Our analysis is three-fold. As a preliminary step we simulate a monetary policy shock that consists in a rise of the policy interest rate occurring in the course of a single simulation. The second step is to perform Monte Carlo experiments involving the policy rate only. Finally, we carry out a global sensitivity analysis exercise in order to control for other parameters, in particular to evaluate possible interactions between the monetary policy and the credit policy adopted by the banking system. We point out that the last kind of analysis is implemented through a novel methodology which greatly reduces the computational burden of simulations. Consistently with part of the empirical literature, from all the three experiments the robust result emerges that a more restrictive monetary policy increases economic inequality, the main reasons being increasing unemployment and increasing capital income. This is an interesting result as it suggests that the social responsibility of central banks may go beyond their role of keeping price stability and that inequality can be a very important information for central bankers when they set their policy goals. Moreover, our finding could even constitute an argument in favor of a more democratic control of monetary policy actions. Moreover, we find that the effect of monetary policy on inequality seems to be smaller when the bank’s willingness to lend is lower. This entails that the ability of monetary policy to affect inequality may be reduced during recessions, when “credit crunches” are more likely to occur. As a consequence, fears of possible distortionary effects caused by expansionary monetary policy interventions may be unmotivated if the economy is in recession. Finally, our analysis highlights that the influence of monetary policy on inequality is asymmetric, as different groups of households are hit by policy shocks in different ways. In particular, a restrictive monetary policy appears to increase inequality for the lower and middle-income classes, but not for the top class. This additional insight hints that it could be useful for empirical studies to focus not only on the whole population of households but also on sub-groups. Although rich enough to provide non-trivial insights, we concede that our model suffers from some important limitations such as the absence of households’ debts and more diversified portfolio investment opportunities. However, the introduction of these features is left for future works.

Answer 1

The key point of the article is that monetary policy has distributive properties as they substantially affect inequality that exists in terms of distribution of income and wealth in an economy. This is because of two primary reasons. Firstly monetary policy can have an impact on different sources of income in different ways. Secondly households are not homogenous when it comes to their size and their source of income. In the article authors have used simulation models to point to the distributive properties of monetary policies and these simulation models have reinforced the theoretical concept that a restrictive monetary policy results in an increase in economic inequality. The other main point of the article is that the control of monetary policy actions should be done in a democratic manner. Lastly the article points out to a very interesting observation and finding that the influence of monetary policy on income and wealth inequality is not symmetric in nature, rather it is asymmetric. This is because different households are differently impacted by the monetary policies.