Income-specific consumption baskets and the interaction between inequality and monetary policy
Macroeconomists are increasingly looking at the interaction between economic inequality and macroeconomic policy. Past research has looked at the impact of monetary policy on the level of income or wealth inequality, but a new literature has started to focus on how the level of inequality changes the effectiveness of countercyclical monetary and fiscal policy. This project helps push that research frontier forward by investigating how differences in consumption baskets among households may affect the transmission of monetary policy. First, the researchers will document differences in consumption baskets across the income distribution. Using those data, they will measure the variation in price stickiness among U.S. households. If this heterogeneity varies significantly by income level, it’s possible that the upward shift of income over the past several decades may have significantly enhanced or reduced the effectiveness of monetary policy. Understanding the strength of monetary policy in an era of high economic inequality is critical for informing policymakers of the optimal strategy for fighting the next recession.