Working Paper: NBER ID: w30667
Authors: Roberto Chang
Abstract: Should central banks care about inequality? To address this question, we extend a standard model of time inconsistency in monetary policy to allow for heterogeneity. As in the standard analysis, lack of policy commitment leads to a bias towards socially excessive inflation. But the novel result is that, in the presence of heterogeneity, the bias can be offset by assigning the central bank a mandate under which agents with higher nominal wealth are given a higher relative weight than under the social welfare function. In other words, society should choose a central banker that is less egalitarian than itself, a result reminiscent of Rogoff’s “conservative central banker”. Our analysis underscores that including a concern for redistribution in the central bank’s mandate can enhance policy credibility, but the details can be unexpected and should reflect the role of the mandate in overcoming policy distortions.
Keywords: No keywords provided
JEL Codes: E6; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central bank mandate (E52) | Improved policy credibility (E61) |
| Central bank mandate (E52) | Mitigated bias towards excessive inflation (E31) |
| Higher nominal wealth weighting in central bank mandate (E49) | Welfare loss from inflation (D69) |
| Central bank mandate concerned with inequality (E52) | Less egalitarian outcomes (D63) |
| Central bank prioritizing wealthier agents (E52) | Better overall outcomes (I14) |
| Inflation (E31) | Harms poorer agents more (L85) |