Monetary Policy, Labor Mobility and the Inflation-Inequality Trade-off

Ester Faia, Ekaterina Shabalina and David Wiczer
Authors registered in the RePEc Author Service: Marianna Kudlyak

No 17741, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the inflation-inequality trade-off and the distributional consequences of monetary policy in a model with endogenous countercyclical wage inequality. We build a heterogeneous-agents model with uninsurable risk, borrowing constraints, dynamic discrete occupational choice and nominal rigidities. Uninsurable risk distorts labor reallocation, which acts as a cost-push shock: when workers’ reallocation declines, inequality rises, and the output-inflation trade-off worsens, as firms’ marginal costs increase. Our model replicates business-cycle statistics of macro and inequality variables; we validate its monetary transmission mechanism, along the income distribution, in response to high-frequency identified monetary policy shocks, using CPS data and panel local projection methods.

JEL-codes: D31 E21 J22 J23 J31 J62 (search for similar items in EconPapers)
Date: 2022-12
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