Abstract
AbstractThis article studies a labor‐supply‐side channel affecting the relationship between monetary policy and income inequality. To this end, I build a heterogeneous‐agent New Keynesian economy with indivisible labor in which both macro and micro labor supply elasticities are endogenously generated. First, I find that monetary policy shocks have distributional consequences due to a substantial heterogeneity in labor supply elasticity across households. Second, a more equal economy is associated with more effective monetary policy in terms of output. I document supporting empirical evidence for the key mechanism of the model using microlevel data and state‐level data in the United States.
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