Monetary Policy and Inequality: How Does One Affect the Other?

Eunseong Ma

Departmental Working Papers from Department of Economics, Louisiana State University

Abstract: This study investigates the relation between monetary policy and income inequality by asking how one affects the other: the effect of monetary policy on income inequality and the impact of the long-run level of income inequality on the effectiveness of monetary policy. To this end, I build a heterogeneous-agent New Keynesian economy with indivisible labor in which both macro and micro labor supply elasticities are endogenously generated. I find that monetary policy shocks have distributional consequences due to a substantial heterogeneity in labor supply elasticity across households. I also show that a more equal economy is associated with more effective monetary policy in terms of output since it generates a larger aggregate elasticity of labor supply, thereby having a flatter New Keynesian Philips curve. Empirical evidence based on state-level panel data supports this model result.

Date: 2020-02
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https://www.lsu.edu/business/economics/files/workingpapers/pap20_02.pdf (application/pdf)

Related works:
Journal Article: MONETARY POLICY AND INEQUALITY: HOW DOES ONE AFFECT THE OTHER? (2023)
Working Paper: Monetary Policy and Inequality: How Does One Affect the Other? (2022)
Working Paper: Monetary Policy and Inequality: How Does One Affect the Other? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:lsu:lsuwpp:2020-02

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