Working Paper: NBER ID: w22418
Authors: Tobias Broer; Niels-Jakob H. Hansen; Per Krusell; Erik Berg
Abstract: We argue that a 2-agent version of the standard New Keynesian model—where a “worker” receives only labor income and a “capitalist” only profit income— offers insights about how income inequality affects the monetary transmission mechanism. Under rigid prices, monetary policy affects the distribution of consumption, but it has no effect on output as workers choose not to change their hours worked in response to wage movements. In the corresponding representative-agent model, in contrast, hours do rise after a monetary policy loosening due to a wealth effect on labor supply: profits fall, thus reducing the representative worker’s income. If wages are rigid too, however, the monetary transmission mechanism is active and resembles that in the corresponding representative-agent model. Here, workers are not on their labor supply curve and hence respond passively to demand, and profits are procyclical.
Keywords: New Keynesian; monetary policy; income inequality; heterogeneous agents
JEL Codes: E00; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | Consumption distribution (D39) |
| Monetary policy (E52) | Output (Y10) |
| Wage rigidity (J31) | Monetary transmission mechanism (E52) |
| Monetary policy (E52) | Labor supply (J22) |
| Nominal rigidity (D50) | Effectiveness of monetary policy (E52) |
| Income effects and wage rigidity (J31) | Response of output to monetary policy shocks (E39) |