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Inflation and income inequality in a Schumpeterian economy with heterogeneous wealth and skills

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  • Zheng, Zhijie
  • Wan, Xi
  • Huang, Chien-Yu

Abstract

We explore the effects of monetary policy on innovation and income inequality in a scale-invariant endogenous growth model with heterogeneous households and a cash-in-advance (CIA) constraint on research and development investment. Household heterogeneity arises from unequal distributions of wealth and skill, giving rise to interest and labor income inequalities, respectively. We find that inflation unambiguously reduces innovation and economic growth, whereas its impact on income inequality can be positive, negative, or U-shaped. The relationship between inflation and income inequality depends on the relative dominance of wealth heterogeneity to skill heterogeneity and how the ratio of interest income to labor income responds to inflation. The model is calibrated to the US economy, and the numerical results support these implications on income inequality.

Suggested Citation

  • Zheng, Zhijie & Wan, Xi & Huang, Chien-Yu, 2023. "Inflation and income inequality in a Schumpeterian economy with heterogeneous wealth and skills," Economic Modelling, Elsevier, vol. 121(C).
    • Handle: RePEc:eee:ecmode:v:121:y:2023:i:c:s0264999323000056
    DOI: 10.1016/j.econmod.2023.106193
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    More about this item

    Keywords

    Income inequality; Inflation; Wealth and skill heterogeneity; Endogenous economic growth;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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