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Income Inequality, Monetary Policy, and the Business Cycle

  • Stuart J. Fowler

The effects of changes in monetary policy are studied in a general equilibrium model where money facilitates transactions. Because there are two types of agents, workers and capitalists, different elasticities of money demand exist, implying that monetary policy influences the distribution of income. Only when earnings inequality is incorporated into monetary policy rule is the model able to replicate cyclical fluctuations of both real and nominal aggregates as well as the inequality measure. Additionally, monetary policy becomes more countercyclical when the fraction of transfers received by the workers increases. These results can support a theory that the distribution of seigniorage revenues between the workers and capitalists changed in 1979

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 184.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:184
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