Monetary policy becomes more effective when there is a greater degree of household inequality, a working paper published by the European Central Bank argues.

In Monetary policy, agent heterogeneity and inequality: insights from a three-agent New Keynesian model, Maria Eskelinen presents a new Keynesian model featuring three different types of representative agents. These are “poor hand-to-mouth”, “wealthy hand-to-mouth” and “non-hand-to-mouth” households.

Eskelinen says her model is “easier to