Working Paper: CEPR ID: DP5609
Authors: Kent Matthews; David Meenagh; Patrick Minford; Bruce Webb
Abstract: Macro models generally assume away heterogeneous welfare in assessing policies. We investigate here within two aggregative models - one with a representative agent, the other a long-used forecasting model of the UK - whether allowing for differences in welfare functions (specifically between those in continuous employment and those with frequent unemployment spells) alters the rankings of monetary policies. We find that it does but that a set of policies (money supply targeting implemented by money supply control) can be found that are robust in the sense of avoiding very poor outcomes for either of the two groups.
Keywords: heterogenous welfare; interest rate setting; money supply rules; price level targeting; robustness
JEL Codes: E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary regimes (E42) | Welfare differences between skilled and unskilled groups (I39) |
| Monetary supply targeting (E52) | More favorable outcomes for both groups (I14) |
| Indexation responding endogenously (C43) | Reductions in variances of consumption and unemployment (E21) |
| Choice of monetary regime (E42) | Welfare implications for labor market segments (J48) |
| Traditional macro models (E13) | Underestimation of costs for unskilled group (J39) |
| Unemployment variation (J64) | Welfare impact on unskilled (F66) |
| Consumption variation (E21) | Welfare impact on skilled (F66) |
| Inflation targeting (E31) | Misleading welfare measures (I30) |
| Long-term unemployment risks (J64) | Welfare implications for unskilled (F66) |