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

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  • Juan J. Dolado
  • Gergő Motyovszki
  • Evi Pappa

Abstract

We 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.

Suggested Citation

  • Juan J. Dolado & Gergő Motyovszki & Evi Pappa, 2021. "Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 292-332, April.
    • Handle: RePEc:aea:aejmac:v:13:y:2021:i:2:p:292-332
    DOI: 10.1257/mac.20180242
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    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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