Inclusive Monetary Policy in a Model with Heterogeneous Workers

Federico Ravenna and Carl Walsh

No 19922, CEPR Discussion Papers from Centre for Economic Policy Research

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-offs faced by 'inclusive policies', and the implications for the efficiency of the aggregate economy? We address this question within a model that allows for workers with different levels of productivity competing in the same job market. We compare traditional and 'inclusive' policies 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 inflation outcomes. Inclusive policies come at a high cost in terms of inflation, 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 beneficial for the overall economy, making monetary policy much more inclusive results in sizeable deviations from the first best allocation.

Keywords: Unemployment; Heterogeneity; Selection; Monetary policy (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 (search for similar items in EconPapers)
Date: 2025-02
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