Monetary policy and income inequality in a Schumpeterian economy with endogenous step size

Abstract

This letter analyzes the effects of monetary policy on economic growth and income inequality in a Schumpeterian model with heterogeneous households and endogenous step size. We find that a higher nominal interest rate decreases the arrival rate of innovation but increases the step size. Thus, increasing the nominal interest rate has an ambiguous effect on economic growth and income inequality. Under our calibrated values, although monetary policy may have a positive or an inverted-U effect on economic growth, the effect of monetary policy on income inequality remains positive over a wide range of the strength of the CIA constraint.