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The labor share and the monetary transmission

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  • Bernardino Adão
  • André Silva

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.

Suggested Citation

  • Bernardino Adão & André Silva, 2022. "The labor share and the monetary transmission," Working Papers w202218, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202218
    as

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    References listed on IDEAS

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