Interaction between monetary policy and income inequality in a deposits market

Grigoryan, Aleksandr (2011): Interaction between monetary policy and income inequality in a deposits market. Forthcoming in:

Abstract

The paper studies the impact of income inequality on the monetary policy and the feedback, in a partial equilibrium framework. Wealth differences of depositors play crucial role in determining aggregate deposits, available for loans. Non-homothetic structure of depositors' return function makes distribution of deposits relevant for the aggregate. Unequal distribution of resources leads to a lower (deposit) price elasticity for the rich relative to the poor, and this results in higher markups and lower level of collected total deposits. Interaction between monetary policy and income inequality leads the following results: (i) higher inequality reduces the power of monetary policy in terms of depositors' responsiveness to the policy changes and (ii) expansionary (contractionary) monetary policy increases (decreases) savings differences. The model provides a new source of financial friction, relevant for economies with high income inequality.

• Item Type: MPRA Paper
• Language: English
• Keywords: Deposit holdings inequality; non-homothetic technologies; monetary policy
• Subjects: D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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