Article ID Journal Published Year Pages File Type
885100 Journal of Economic Psychology 2012 8 Pages PDF
Abstract

This paper examines the implications of “keeping up with the Joneses” preferences (jealousy) for the welfare effects of monetary policy. I develop a New Keynesian model, where households are jealous and the central bank follows the Taylor rule. I show that the welfare effects of monetary policy over time depend significantly on the relative strength of the consumption externality caused by jealousy and the monopolistic distortion. When a first-order approximation of the utility function is used, then the main result is the following: If jealousy (the monopolistic distortion) dominates, then a decrease in the interest rate reduces (increases) welfare in the short run, but increases (reduces) welfare in the medium run. However, the use of a second-order approximation changes the sign of the overall welfare effect of monetary policy if the initial level of employment is at the optimal level or just below it.

► This paper introduces keeping up with the Joneses preferences into a monetary policy model. ► The welfare effects of monetary policy depend on jealousy and the monopolistic distortion. ► If jealousy dominates, monetary expansion reduces welfare in the short run. ► If jealousy dominates, monetary expansion increases welfare in the medium run. ► If the monopolistic distortion dominates, the welfare effects are reversed.

Related Topics
Social Sciences and Humanities Business, Management and Accounting Marketing
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