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

Juan Dolado, Gergő Motyovszki and Evi Pappa

American Economic Journal: Macroeconomics, 2021, vol. 13, issue 2, 292-332

Abstract: We provide a new channel through which monetary policy has distributional consequences at business cycle frequencies. We show that an unexpected monetary easing increases labor income inequality between high-skilled and less-skilled workers. To rationalize these findings, we build a New Keynesian DSGE model with asymmetric search-and-matching (SAM) frictions and capital-skill complementarity (CSC) in production. We show that CSC on its own introduces a dynamic demand amplification mechanism: the increase in high-skilled employment after a monetary expansion makes complementary capital more productive, encouraging a further rise in investment demand and creating a multiplier effect. SAM asymmetries magnify this channel.

JEL-codes: E12 E24 E25 E32 E52 J63 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity (2018) Downloads
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DOI: 10.1257/mac.20180242

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