Effects of monetary policy on the skill premium and the growth rate in a directed technical change model with heterogeneous cash‐in‐advance constraints

Oscar Afonso and Pedro Lima

International Journal of Finance & Economics, 2023, vol. 28, issue 4, 4020-4036

Abstract: This article analyses the balanced‐growth‐path effects of monetary policy (inflation) on the skill premium and the growth rate in the context of a directed technical change model with cash‐in‐advance (CIA) constraints specific to the unskilled and skilled sectors. Calibrating the model using data from 36 countries, the presence of more stringent CIA constraints in the unskilled sector, as supported by the literature, causes inflation to have a positive effect on the skill premium. Moreover, it also increases the negative impact of inflation on the growth rate in relation to the baseline scenario of homogeneous CIA constraints. A lower labour share and higher inflation in general magnify these effects on both variables while a relative lower importance of the unskilled sector does the opposite with respect to the skill premium. Therefore this article innovates in three important ways: (i) we add an additional channel through which inflation affects inequality; (ii) we highlight the importance of avoiding ignoring differences of liquidity constraints across the economy in the context of endogenous growth models to not underestimate the negative long‐run impacts of inflation; (iii) the results suggest that developing countries that have difficulty in achieving price stability in the long‐run can mitigate the negative effects of inflation by reducing constraints faced by the unskilled sector and promoting the development of the skilled sector.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/ijfe.2633

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:28:y:2023:i:4:p:4020-4036

Ordering information: This journal article can be ordered from
http://jws-edcv.wile ... PRINT_ISSN=1076-9307

Access Statistics for this article

International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().