How Do Inequalities Affect the Natural Interest Rate, and How Do They Impact Monetary Policy? Comparing Germany, Japan and the Us

This paper analyzes how different forms of inequality have affected potential growth and the natural rate of interest in the U.S., Germany, and Japan during the last two decades. Growing inequality may constitute a drawback for the recovery of these economies after the Great Recession (GR) and the Covid-19 pandemic. To this aim, we modify the semi-structural model initially proposed by Holston, Laubach and Williams (2017) by considering the effects of several types of inequalities. We jointly estimate potential growth and the natural interest rates showing that the latter can substantially modify the time path of the real interest rate that prevails when economies are at full strength and inflation is stable. Finally, we study the effects of our estimates for the reaction functions of the monetary authorities.