BOK Working Paper No.2022-19, Optimal Monetary Policy under Heterogeneous Consumption Baskets | (상세) |  Bank of Korea
Central bank: bok | Type: statement | Date: 2022-11-25

BOK Working Paper No.2022-19, Optimal Monetary Policy under Heterogeneous Consumption Baskets
2022.11.25
Optimal Monetary Policy
Heterogeneous Consumption Baskets
Multi-sector Economy
Central Bank
Distributional Inefficiencies
Financial & Monetary Economics Team(82-2-759-5447)
Attachment
BOK Working Paper No.2022-19.pdf
Title: Optimal Monetary Policy under Heterogeneous Consumption Baskets
Author: Seunghyeon Lee(BOK)
We study optimal monetary policy in a multi-sector economy where consumption baskets (and hence price indices) are heterogeneous across households. Incorporating consumption basket heterogeneity reveals new redistributive channels for monetary policy, calling for the central bank to address distributional inefficiencies on top of those arising from nominal distortions. We find that optimal monetary policy in this environment (i) targets non-zero output gaps, and (ii) is redistributive in favor of the (borrowing-constrained) poor, by targeting an inflation measure that overweighs the consumption baskets of the poor compared to a measure that solely responds to price stickiness. A policy that neglects heterogeneous consumption baskets suboptimally benefits the rich at the cost of the poor.