IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp11494.html
   My bibliography  Save this paper

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

Author

Listed:
  • Dolado, Juan J.

    () (European University Institute)

  • Motyovszki, Gergö

    () (European University Institute)

  • Pappa, Evi

    () (European University Institute)

Abstract

In order to improve our understanding of the channels through which monetary policy has distributional consequences, we build a New Keynesian model with incomplete asset markets, asymmetric search and matching (SAM) frictions across skilled and unskilled workers and, foremost, capital-skill complementarity (CSC) in the production function. Our main finding is that an unexpected monetary easing increases labor income inequality between high and low-skilled workers, and that the interaction between CSC and SAM asymmetry is crucial in delivering this result. The increase in labor demand driven by such a monetary shock leads to larger wage increases for high-skilled workers than for low-skilled workers, due to the smaller matching frictions of the former (SAM-asymmetry channel). Moreover, the increase in capital demand amplifies this wage divergence due to skilled workers being more complementary to capital than substitutable unskilled workers are (CSC channel). Strict inflation targeting is often the most successful rule in stabilizing measures of earnings inequality even in the presence of shocks which introduce a trade-off between stabilizing inflation and aggregate demand.

Suggested Citation

  • Dolado, Juan J. & Motyovszki, Gergö & Pappa, Evi, 2018. "Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity," IZA Discussion Papers 11494, Institute for the Study of Labor (IZA).
    • Handle: RePEc:iza:izadps:dp11494
    as

    Download full text from publisher

    File URL: http://ftp.iza.org/dp11494.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chris Redl, 2015. "Optimal Monetary Policy with Learning by Doing," Working Papers 490, Economic Research Southern Africa.
    2. Konstantinos Angelopoulos & Wei Jiang & James Malley, 2017. "Targeted fiscal policy to increase employment and wages of unskilled workers," Studies in Economics 1704, School of Economics, University of Kent.
    3. Pappa, Evi & Sajedi, Rana & Vella, Eugenia, 2015. "Fiscal consolidation with tax evasion and corruption," Journal of International Economics, Elsevier, vol. 96(S1), pages 56-75.
    4. Morten O. Ravn, 2008. "The Consumption-Tightness Puzzle," NBER Chapters,in: NBER International Seminar on Macroeconomics 2006, pages 9-63 National Bureau of Economic Research, Inc.
    5. Campolmi, Alessia & Faia, Ester, 2015. "Rethinking Optimal Exchange Rate Regimes With Frictional Labor Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 19(05), pages 1116-1147, July.
    6. Ayako Saiki & Jon Frost, 2014. "Does unconventional monetary policy affect inequality? Evidence from Japan," Applied Economics, Taylor & Francis Journals, vol. 46(36), pages 4445-4454, December.
    7. Nils Gornemann & Keith Kuester & Makoto Nakajima, 2012. "Monetary policy with heterogeneous agents," Working Papers 12-21, Federal Reserve Bank of Philadelphia.
    8. Gornemann, Nils & Kuester, Keith & Nakajima, Makoto, 2016. "Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy," CEPR Discussion Papers 11233, C.E.P.R. Discussion Papers.
    9. repec:eee:moneco:v:88:y:2017:i:c:p:70-89 is not listed on IDEAS
    10. Campolmi, Alessia & Gnocchi, Stefano, 2016. "Labor market participation, unemployment and monetary policy," Journal of Monetary Economics, Elsevier, vol. 79(C), pages 17-29.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity
      by Christian Zimmermann in NEP-DGE blog on 2018-06-18 14:23:25

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andrea Colciago & Anna Samarina & Jakob de Haan, 2018. "Central bank policies and income and wealth inequality: A survey," DNB Working Papers 594, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    monetary policy; search and matching; capital-skill complementarity; inequality;

    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp11494. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak). General contact details of provider: http://www.iza.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.