Stefan Gerlach, Eric Monnet and the conference participants for their helpful comments. We are also grateful for suggestions made by participants at the Financial Stability Conference held at the European Banking Center at Tilburg University. The views expressed here are our own and are not necessarily those of LUISS (Roma), Duke University, the Center for Economic Policy Research, Rutgers University, or the National Bureau of Economic Research. Support from the Norges Bank for this project is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

We describe the origins of inflation targeting in New Zealand, and then use the four key attributes of inflation targeting – independence, the inflation target, transparency, and accountability – as an organizing device to analyze macroprudential policy ‘institutions ’ – the rules, regulations and governance frameworks that implement macroprudential policies. ∗ The views expressed in this paper are those of the author(s) and do not necessarily reflect the views of the Reserve Bank of New Zealand. This paper was prepared for a conference hosted by the Reserve Bank of New Zealand and the International Journal of Central Banking. The authors thank John Williams, and our discussant, Sir Charles

All of these areas face big questions, not least of which is the interaction between them. Conventional thinking about these policies has been challenged by the financial crisis. New policies and interventions have been deployed; new regulations introduced; new supervisory practices adopted. While enhancing understanding of the economy and financial system is of timeless importance, the recent explosion in the amount and variety of available data offers the prospect of deeper insight. And fundamental technological, institutional, societal and environmental change means that we have an ongoing need to reassess our thinking and policies over a long horizon. World-class policymaking requires frontier research. The Bank of England is, therefore, publishing a co-ordinated One Bank Research Agenda, spanning all aspects of central banking and focusing in particular on the intersections between policy areas. The five themes within it are broad, reflecting the diversity of the agenda. They deliberately emphasise new challenges and new directions, while recognising that familiar questions facing central banks remain no less important. The five themes are summarised under the following headings: – Theme 1: Central bank policy frameworks and the interactions between monetary policy, macroprudential policy and microprudential policy, domestically and internationally; – Theme 2: Evaluating regulation, resolution and market structures in light of the financial crisis and in the face of the changing nature of financial intermediation; – Theme 3: Operationalising central banking: evaluating and enhancing policy implementation, supervision and communication; – Theme 4: Using new data, methodologies and approaches to understand household and corporate behaviour, the domestic and international macroeconomy, and risks to the financial system; and – Theme 5: Central bank response to fundamental technological, institutional, societal and environmental change.

In this paper, I investigate the effect of income inequality on optimal monetary policy design. To this end, I introduce heterogeneity by incorporating segmented labor markets with a Limited Asset Market Participation (LAMP) into the standard New Keynesian DSGE model used in Erceg et al. (2000). Because of the difference in real rigidity across sectors, an economic shock, especially a monetary policy shock, causes a variation in the wage premium. This variation in wage premium encourages firms to substitute workers across sectors, which induces stickier aggregate nominal wage and more volatile macroeconomic variables. At the same time, however, a change in wage premium leads to a greater change in the employment gap across sectors (given a plausible value of elasticity of substitution), and thus income inequality is negatively related to the wage premium. In addition, income inequality poses a trade-off with traditional policy objectives such as the output gap even under flexible wages. Therefore, it is desirable to include inequality as a separate goal for a Central Bank. Welfare analysis of various scenarios shows that when a Central Bank ignores inequality, focusing only on aggregate variables, there are significant welfare losses.