Redistributive Policy Shocks and Monetary Policy with Heterogeneous Agents

Vol: 
59/2024
Author name: 
Bahl O
Ghate C
Mallick D
Year: 
2024
Month: 
September
Abstract: 

Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse shocks. Such interventions involve a large increase in the procurement and redistribution of agriculture output, which we refer to as 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 two-sector-two-agent NK-DSGE model (2S-TANK) to address these questions. Using Indian data, we estimate the model using a Bayesian approach. We characterize optimal monetary policy. We show that the welfare costs of redistributive policy shocks are substantially higher when non-optimized rules are used to set monetary policy in response to such shocks.

Publication file: 

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