Research Feature - April 2024

Inequality and the Zero Lower Bound

Author: Jesús Fernández-Villaverde, Joël Marbet, Galo Nuño y Omar Rachedi

Summary. We study how household inequality shapes the effects of the nominal interest rate zero lower bound (ZLB) on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve the model non-linearly using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households’ precautionary saving by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e. the extent to which monetary policy shifts the long-run real rate (natural rate) of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality.

Inequality and the Zero Lower Bound (141 KB)