Does monetary policy favor the skilled?
31 Pages Posted: 16 Sep 2016 Last revised: 19 Jul 2022
Date Written: November 12, 2020
Abstract
This paper examines whether the impact of monetary policy on welfare is altered when labor skill heterogeneity is incorporated in a limited participation framework. By endogenizing labor-leisure decisions and including labor heterogeneity, we find that not only is there a risky component to the income of financial market participants, but the wage income of non-participants is also subject to risk. This generates a diminished impact of monetary policy on welfare along with a stronger redistributive impact. The redistributive effect is further strengthened for higher levels of non-interest bearing savings among non-participants of financial market. In particular, expansionary monetary policy redistributes consumption and leisure from low to high skilled workers via an increased wage premium along with direct gains accrued from monetary transfers by high skilled agents who are connected to financial markets. Thus, welfare gains attributed to monetary expansion are far less when considering skill heterogeneity. Further, such gains are subject to the share of high skilled labor in the production of goods - increasing that share above a threshold renders a welfare-improving role for monetary tightening. To explore the implications of these results, we also analyze the impact of monetary policy in a crisis scenario.
Keywords: Monetary Policy, Heterogenous Labor, Limited Participation, Distributional Effects
JEL Classification: E5, E52, E62
Suggested Citation: Suggested Citation