Quality, price stickiness, and monetary policy

From Micro to Macro: A New Methodology to Discriminate Among Models

“…Cravino et al (2018) is closest to our work, who empirically show that high-income households consume goods which have stickier, and less volatile prices than middle-income households. Kim (2016) presents related results.…”

Monetary Policy and Inequality: How Does One Affect the Other?

“…There are a few studies on the role of inequality in the effectiveness of monetary policy. Using retail scanner and consumer panel data, Kim (2017) empirically documents that low-price brands change prices more frequently than high-price brands, and demand for low-price brands has a negative correlation with household income. Using a menu-cost model with vertically differentiated products and heterogeneous consumers, he concludes that the impact of monetary policy on real output decreases when there are more low-income consumers in the economy.…”

“…Based on a quantitative New-Keynesian model with heterogeneous households where sectors are heterogeneous in their frequency of price changes, they conclude that a realistic change in inequality does not substantially affect the responses of aggregate prices and output to monetary policy. The current paper contributes to the literature by emphasizing the role of different shapes of reservation wage distributions depending on a degree of inequality in the causal relation between inequality and the effectiveness of monetary policy, while Kim (2017) and Cravino, Lan and Levchenko (2018) focus on the channels of different frequency of price changes and heterogeneous composition of consumption goods across households. Because of the different key mechanism from those in Kim (2017) and Cravino, Lan and Levchenko (2018), the main result in the paper contradicts theirs but is supported by empirical papers in the literature such as Alpanda and Zubairy (2017) and Voinea, Lovin and Cojocaru (2018).…”

“…As far as the second question is concerned, how the long-run level of economic inequality affects the effectiveness of monetary policy is also an important issue, when considering different degrees of inequality across countries and even within a country. In spite of its importance, this topic is relatively unstudied in the literature, and existing papers (e.g., Kim (2017) and Cravino, Lan and Levchenko (2018)) do not have a general consensus. 5 Filling this gap is another primary goal of this study.…”

“…5 Kim (2017) finds that an economy when there are more low-income consumers has a smaller impact of monetary policy on real output, but Cravino, Lan and Levchenko (2018) conclude that a change in the level of inequality does not significantly impact the responses of aggregate prices and output to monetary policy. The main result in the paper contradicts that in Kim (2017) or Cravino, Lan and Levchenko (2018): a more equal economy is associated with more effective monetary policy in terms of output. The finding in this study is supported by empirical papers in the literature such as Alpanda and Zubairy (2017) and Voinea, Lovin and Cojocaru (2018).…”