Does the FED care about income inequality? A quantitative examination

Abstract

We model various policy rules in settings that have non-trivial impacts on inequality. The policy rule that best describes the data is one that incorporates the Gini as an important component. In this case, a temporary and unexpected change to a more accommodative policy leads to a temporary improvement in inequality. Additionally, when there is deterioration in inequality, policy becomes more accommodative with a lag. For most calibrations, the reactionary policy rule benefits the workers at the cost of the capitalists; lifetime consumption of the worker is made smoother which increases their elasticity for labour resulting in a destabilised economy that is costly to the capital owners.