The effects of inflation target changes in an open economy with heterogeneous households

Abstract

When discussing the level for the target inflation in a Monetary Union typically questions of efficacy of stabilization of monetary policy or conditions for the fulfilment of an optimal monetary currency are in the forefront. Even when inequality is a well- ocumented fact as well as di¤erent degrees of inequality across economies this is not brought forward to the discussion. We show here that this is a consideration of first order. We build a model where this is the only fundamental that distinguishes countries in the area and find that these different degrees of inequality determine that different economies will be affected differently by a change in the target for inflation. We show how the transmission mechanism can in this case amplify the effects obtained when heterogeneity is not considered. Moreover, we show that the effects over the different agents depend on their particular characteristics and on the economy where they live in. We also obtain that a redistribution of wealth in a given country increases efficiency and equality in all countries.

The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.