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Monetary Policy, Income Distribution and Economic Welfare——Based on Bayesian Estimation of DSGE Model

【Authors】
JIANG Chun, XIANG Lijin & XIAO Zumian
【WorkUnit】
JIANG Chun(Economic Development Research Center of Wuhan University)
XIANG Lijin, XIAO Zumian(Economics and Management School of Wuhan University)
【Abstract】

In the context of increasing inequality of income distribution in China, the impact of interest rate variation on income distribution and how the central bank's monetary policy should take income distribution into account become very important issues. We, guided by the New Keynesian DSGE model, introduce certain household heterogeneity with two types of households: the “Ricardian Household” and the “Rule-of-thumb Household”. By estimating and simulating such a DSGE model with price and wage rigidity, this paper analyzes the dynamics of consumption and income distribution under the exogenous impacts of technology, wage inflation and interest rate variation. And the optimal Taylor rule is obtained by solving the problem of minimization of economic welfare loss through numerical computation. The study shows that positive technological impacts will increase economic output, reduce inflation and increase inequality in consumption allocation but will not affect income distribution. Wage markup impact of “Ricardian Household” (“Rule-of-thumb Household”) would reduce (increase) inequality in consumption as well as income distribution. However, it has a more significant impact on the consumption (income) inequality index. A positive interest rate variation would increase inequality in both consumption and income distribution. For China's central bank, strengthening the intervention of inflation is a very effective way to reduce the inequality in both consumption and income distribution in the economy.

JEL:E12,E31, E58

【KeyWords】
Interest Rate, Income Distribution, Economic Welfare, DSGE Model, Bayesian Estimation