Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity

Juan Dolado, Gergő Motyovszki and Evi Pappa

No 11494, IZA Discussion Papers from IZA Network @ LISER

Abstract: In order to improve our understanding of the channels through which monetary policy has distributional consequences, we build a New Keynesian model with incomplete asset markets, asymmetric search and matching (SAM) frictions across skilled and unskilled workers and, foremost, capital-skill complementarity (CSC) in the production function. Our main finding is that an unexpected monetary easing increases labor income inequality between high and low-skilled workers, and that the interaction between CSC and SAM asymmetry is crucial in delivering this result. The increase in labor demand driven by such a monetary shock leads to larger wage increases for high-skilled workers than for low-skilled workers, due to the smaller matching frictions of the former (SAM-asymmetry channel). Moreover, the increase in capital demand amplifies this wage divergence due to skilled workers being more complementary to capital than substitutable unskilled workers are (CSC channel). Strict inflation targeting is often the most successful rule in stabilizing measures of earnings inequality even in the presence of shocks which introduce a trade-off between stabilizing inflation and aggregate demand.

Keywords: capital-skill complementarity; search and matching; monetary policy; inequality (search for similar items in EconPapers)
JEL-codes: E24 E25 E52 J64 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2018-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

Published - published in American Economic Journal: Macroeconomics, 2021,13 (2), 292-332.

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Related works:
Journal Article: Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity (2021)
Working Paper: Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity (2018)
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