Price Stickiness along the Income Distribution and the Effects of Monetary Policy / Javier Cravino, Ting Lan, Andrei A. Levchenko.

Format:

Book

Author/Creator:

Cravino, Javier.

Contributor:

National Bureau of Economic Research.

Lan, Ting.

Levchenko, Andrei A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24654.

NBER working paper series no. w24654

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

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 households' 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.

Notes:

Print version record

May 2018.