Inclusive Monetary Policy in a Model with Heterogeneous Workers

Federico Ravenna and Carl E. Walshy

Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: Central banks are increasingly debating monetary policies aimed at reducing inequality and ensuring employment gains are spread widely across all parts of the labor market. What are the trade-o§s faced by íinclusive policiesí, and the implications for the e¢ ciency of the aggregate economy? We address this question within a model that allows for workers with di§erent levels of productivity competing in the same job market. We compare traditional and íinclusiveípolicies in terms of their impact on earnings and employment inequality, on the labor market outcomes of lower-productivity, lower-income workers, and in terms of their ináation outcomes. Inclusive policies come at a high cost in terms of ináation, but they can substantially reduce the uneven burden of a recessionary shock on the lowest productivity workers. We provide a normative assessment, and show that while making monetary policy more inclusive is beneÖcial for the overall economy, making monetary policy much more inclusive results in sizeable deviations from the Örst best allocation.

Keywords: Unemployment; heterogeneity; selection; COVID-19; monetary policy. (search for similar items in EconPapers)
Pages: 43 pages
Date: 2024
New Economics Papers: this item is included in nep-dge and nep-mon
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