Thursday, May 23

Redistributive Policy Shocks and Monetary Policy with Heterogeneous Agents

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By Ojasvita Bahl, Chetan Ghate & Debdulal Mallick

Working Paper No- 455


Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse shocks. Such interventions usually involve a large increase in the procurement and redistribution of food, which we call a redistributive policy shock. What is the impact of a redistributive policy shock on inflation and the distribution of consumption amongst rich and poor households? We build a tractable two-sector-two-agent NK DSGE model calibrated to the Indian economy. We show that for an inflation targeting central bank, consumer heterogeneity matters for whether monetary policy responses to a variety of shocks raises aggregate welfare or not.

Keywords TANK models, Inflation Targeting, Emerging Market and Developing
Economies, Procurement and Redistribution, DSGE.

JEL codes: E31, E32, E44, E52, E63.

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