Question

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

Abstract

Empirical studies have pointed out that monetary policy maysignificantly affect income and wealth inequality. To investigatethe distributive properties of monetary policy the authors resortto an agent-based macroeconomic model where firms, households andone bank interact on the basis of limited information and adaptiverules-of-thumb. Simulations show that the model can replicatefairly well a number of stylized facts, especially those relativeto the business cycle. The authors address the issue using threetypes of computational experiments, including a global sensitivityanalysis carried out through a novel methodology which greatlyreduces the computational burden of simulations. The result emergesthat a more restrictive monetary policy increases inequality, eventhough this effect may differ across groups of households. Inaddition, it appears to be attenuated if the bank’s willingness tolend is lower. The overall analysis suggests that inequality canconstitute valuable information also for central banks.

Conclusion

Recent empirical studies have pointed out that monetary policymay significantly affect income and wealth inequality throughseveral channels. This influence is exerted not only becausemonetary policy can affect different income sources in differentways, but also because households are heterogeneous with regards tothe relative size of their income sources. Despite its relevance,this subject has gone relatively ignored by economic theory, mainlybecause the use of representative agents makes mainstream modelsinadequate to assess distributions and inequality (with the recentexception of the HANK models). To properly investigate thedistributive properties of monetary policy, therefore, in thispaper we resort to agent-based techniques in which agents’heterogeneity plays a fundamental role. The theoretical frameworkwe set up is an agent-based macroeconomic model where firms,households and one bank interact on the basis of limitedinformation and adaptive rules-of-thumb. Simulations show that themodel is able to replicate fairly well a number of stylized facts,especially those relative to the business cycle. Subsequently, weemploy the model as a computational laboratory through which we cansimulate changes in monetary policy and assess their influence onincome and wealth inequality. Our analysis is three-fold. As apreliminary step we simulate a monetary policy shock that consistsin a rise of the policy interest rate occurring in the course of asingle simulation. The second step is to perform Monte Carloexperiments involving the policy rate only. Finally, we carry out aglobal sensitivity analysis exercise in order to control for otherparameters, in particular to evaluate possible interactions betweenthe monetary policy and the credit policy adopted by the bankingsystem. We point out that the last kind of analysis is implementedthrough a novel methodology which greatly reduces the computationalburden of simulations. Consistently with part of the empiricalliterature, from all the three experiments the robust resultemerges that a more restrictive monetary policy increases economicinequality, the main reasons being increasing unemployment andincreasing capital income. This is an interesting result as itsuggests that the social responsibility of central banks may gobeyond their role of keeping price stability and that inequalitycan be a very important information for central bankers when theyset their policy goals. Moreover, our finding could even constitutean argument in favor of a more democratic control of monetarypolicy actions. Moreover, we find that the effect of monetary policyon inequality seems to be smaller when the bank’s willingness tolend is lower. This entails that the ability of monetary policy toaffect inequality may be reduced during recessions, when “creditcrunches” are more likely to occur. As a consequence, fears ofpossible distortionary effects caused by expansionary monetarypolicy interventions may be unmotivated if the economy is inrecession. Finally, our analysis highlights that the influence ofmonetary policy on inequality is asymmetric, as different groups ofhouseholds are hit by policy shocks in different ways. Inparticular, a restrictive monetary policy appears to increaseinequality for the lower and middle-income classes, but not for thetop class. This additional insight hints that it could be usefulfor empirical studies to focus not only on the whole population ofhouseholds but also on sub-groups. Although rich enough to providenon-trivial insights, we concede that our model suffers from someimportant limitations such as the absence of households’ debts andmore diversified portfolio investment opportunities. However, theintroduction of these features is left for future works.