Research
WORK IN PROGRESS
“Does the Financial Accelerator accelerate inequalities?”
This study examines the redistribution effects of a conventional monetary policy shock among households in the presence of production-side financial frictions. A Heterogeneous Agents New Keynesian model featuring a financial accelerator is built after empirical evidence for consumption inequality. The results show that the presence of financial frictions significantly increases the magnitude of the Gini coefficient of wealth and other wealth inequality measures after contractionary monetary policy, compared to a scenario in which such frictions are inactive, proving that firms’ financial characteristics affect household wealth inequality. Consumption dynamics are also affected: financial frictions have a significant impact on how households consume and save after a monetary contraction, because they rely differently on labor income to smooth consumption. The relative increase in consumption inequality confirms the empirical results obtained in this study.
“Effects of different financial frictions on households”
The objective of this paper is to investigate the impact of different types of financial frictions on households’ wealth and consumption following a contractionary monetary policy shock. The analysis focuses on two types of frictions: frictions on production firms and frictions on households’ borrowing ability, both of which are incorporated into a HANK model. The findings indicate that the friction in the productive sector has a greater effect on wealth inequality, while the friction on household loans leads to a higher dispersion of consumption compared to the counterfactual scenario. These two dynamics are found to be interconnected. In the model with frictions on household borrowings, households are discouraged from moving towards the lower end of the wealth distribution, resulting in reduced borrowing and consequently lower consumption capacity. Conversely, when there is an active friction on the production side of the economy, more households are pushed towards the lower end of the distribution. This fluctuation increases the Gini index of wealth, but at the same time enables greater economy-wide consumption smoothing, thereby reducing consumption inequality compared to the previous case.