Secular Stagnation and Inequality

Gauti Eggertsson and Neil Mehrotra
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Neil Mehrotra: Brown University

No 1567, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper analyzes the effect of increasing income inequality on real interest rates and the transmission of monetary policy to demand. Using a quantitative overlapping generations model, we investigate how skill-biased technical change and rising monopoly power in the US since 1980 can account for increases in income inequality, a decline in the labor share, and a decline in the investment to output ratio. We find that rising income inequality due to skill-biased technical change has a sizable effect on the real interest rate and attenuates the effectiveness of monetary policy by reducing the demand effect of a fall in the real interest rate.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1567

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