The labor share and the monetary transmission

Bernardino Adão and Andre Silva

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We show that the effectiveness of monetary policy changes with the labor income share. We do this in the context of a continuous time cash-in-advance model with heterogeneous agents and market segmentation. It turns out that the current price level depends on future interest rates through an integral equation. The solution of this integral equation reveals that, after an increase in interest rates, a larger income share implies larger reductions in money, prices and inflation. Monetary policy is more powerful in countries with a higher labor income share.

JEL-codes: C6 E3 E4 E5 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w202218

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