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Inflation, Monetary Policy, and Capital-Labor Inequality

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  • Fabio Milani

Abstract

This paper estimates a New Keynesian model with heterogeneous agents to study the interactions among monetary policy, macroeconomic shocks, and the distribution of income between capital and labor. The model assumes two types of households: workers, who supply labor to firms and receive wage income, and capitalists, who own the firms and enjoy the corresponding profits. There are nominal rigidities in both the goods and labor markets. The structural model is estimated using Bayesian methods to match U.S. data on consumption, corporate profits, wages, inflation, and nominal interest rates, on a sample spanning more than six decades. The empirical results show that contractionary monetary policy and inflationary price-markup shocks lead to increases in inequality. Negative wage markup shocks, which proxy for declining workers' bargaining power, are major drivers of peaks in inequality over the sample; together with price markup shocks, they also account for a significant share of the changes in inequality after COVID.

Suggested Citation

  • Fabio Milani, 2025. "Inflation, Monetary Policy, and Capital-Labor Inequality," CESifo Working Paper Series 12065, CESifo.
    • Handle: RePEc:ces:ceswps:_12065
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    Keywords

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    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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