Inflation, Monetary Policy, and Capital-Labor Inequality

Fabio Milani

No 12065, CESifo Working Paper Series from CESifo

Abstract: This paper estimates a New Keynesian model with heterogeneous agents to study the interactions among monetary policy, macroeconomic shocks, and the distribution of income between capital and labor. The model assumes two types of households: workers, who supply labor to firms and receive wage income, and capitalists, who own the firms and enjoy the corresponding profits. There are nominal rigidities in both the goods and labor markets. The structural model is estimated using Bayesian methods to match U.S. data on consumption, corporate profits, wages, inflation, and nominal interest rates, on a sample spanning more than six decades. The empirical results show that contractionary monetary policy and inflationary price-markup shocks lead to increases in inequality. Negative wage markup shocks, which proxy for declining workers' bargaining power, are major drivers of peaks in inequality over the sample; together with price markup shocks, they also account for a significant share of the changes in inequality after COVID.

Keywords: Heterogeneous-Agent New Keynesian model; income distribution between capital and labor; monetary policy and inequality; inflation and inequality. (search for similar items in EconPapers)
JEL-codes: E25 E31 E32 E52 E58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12065

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