Template-Type: ReDIF-Paper 1.0

Author-Name: Riccardo Masolo
Author-X-Name-First: Riccardo
Author-X-Name-Last: Masolo
Author-Email: riccardo.masolo@unicatt.it
Author-Workplace-Name: Università Cattolica del Sacro Cuore
Author-Workplace-Name: Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore



Title: Heterogeneity and the Equitable Rate of Interest.


Abstract: The equitable rate of interest represents a benchmark to evaluate the cross-sectional effects
of monetary policy. I define it as the real rate of interest that minimizes the welfare losses
associated to cross-sectional heterogeneity, under flexible prices. In a large class of models,
it can be expressed as the payoff of a suitably chosen portfolio.
In a Two-Agent New Keynesian model the deviations of the optimal policy prescription, relative
to a Representative-Agent benchmark, can be traced back to the equitable rate gap:
the difference between prevailing real rates and the equitable rate. This parallels the way in
which the natural rate is the reference stick to evaluate the stance of monetary policy with
regards to aggregate stabilization. Indeed, the difference between the natural rate and the
equitable rate marks the tradeoff between aggregate and cross-sectional stabilization, faced
by a welfare-maximizing policymaker.
Length: 54
Creation-Date: 2023-02
File-URL: http://dipartimenti.unicatt.it/economia-finanza-def128.pdf
File-Format: Application/pdf
File-Function: First version, 2023
Number: def128
Classification-JEL: E31, E52. 
Keywords: Monetary Policy, Heterogeneous Agents, Optimal Policy.
Handle: RePEc:ctc:serie1:def128