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Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity†

Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity† AbstractWe provide a new channel through which monetary policy has distributional consequences at business cycle frequencies. We show that an unexpected monetary easing increases labor income inequality between high-skilled and less-skilled workers. To rationalize these findings, we build a New Keynesian DSGE model with asymmetric search-and-matching (SAM) frictions and capital-skill complementarity (CSC) in production. We show that CSC on its own introduces a dynamic demand amplification mechanism: the increase in high-skilled employment after a monetary expansion makes complementary capital more productive, encouraging a further rise in investment demand and creating a multiplier effect. SAM asymmetries magnify this channel. (JEL E32, E52, E24, E12, E25, J63) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal Macroeconomics American Economic Association

Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity†

Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity†

American Economic Journal: Macroeconomics 2021, 13(2): 292–332 https://doi.org/10.1257/mac.20180242 Monetary Policy and Inequality under Labor Market Frictions and C apital-Skill Complementarity By Juan J. Dolado, Gergo Moty ˝ ovszki, and Evi Pappa* We provide a new channel through which monetary policy has dis- tributional consequences at business cycle frequencies. We show that an unexpected monetary easing increases labor income inequality between high-skilled and less-skilled workers. To rationalize these findings, we build a New Keynesian DSGE model with asymmetric search-and-matching (SAM) frictions and capital-skill complemen - tarity (CSC) in production. We show that CSC on its own intro- duces a dynamic demand amplification mechanism: the increase in high-skilled employment after a monetary expansion makes com- plementary capital more productive, encouraging a further rise in investment demand and creating a multiplier effect. SAM asymme- tries magnify this channel. (JEL E32, E52, E24, E12, E25, J63) uring the last two decades, growing inequality has become a key topic in the pub- lic debate, mainly pointing long-term trends to driven by technological change and globalization. However, following the financial crisis and the extreme measures central banks took to fight it, many questions have arisen about how monetary policy might affect inequality at business cycle frequencies. There are contrasting views on this issue. On the one hand, concerns have been expressed that the highly accom- modative monetary policy stance in advanced economies, as with unconventional quantitative easing, favors richer households disproportionately, thereby contribut- ing to more unequal income and wealth distributions. On the other hand, there are opinions supporting the opposite view, namely, that expansionary monetary policy reduces inequality because borrowers become better off than savers. Of course, central banks consider the economy as a whole when...
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Publisher
American Economic Association
Copyright
Copyright © 2021 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20180242
Publisher site
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Abstract

AbstractWe provide a new channel through which monetary policy has distributional consequences at business cycle frequencies. We show that an unexpected monetary easing increases labor income inequality between high-skilled and less-skilled workers. To rationalize these findings, we build a New Keynesian DSGE model with asymmetric search-and-matching (SAM) frictions and capital-skill complementarity (CSC) in production. We show that CSC on its own introduces a dynamic demand amplification mechanism: the increase in high-skilled employment after a monetary expansion makes complementary capital more productive, encouraging a further rise in investment demand and creating a multiplier effect. SAM asymmetries magnify this channel. (JEL E32, E52, E24, E12, E25, J63)

Journal

American Economic Journal MacroeconomicsAmerican Economic Association

Published: Apr 1, 2021

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