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Tobias Broer, Ph.D.

Institute for International Economic Studies, Stockholm University, Sweden

Authors: Tobias Broer, Harbo Hansen, Per Krusell, and Erik Oberg

Abstract: We present a tractable heterogeneous-agent version of the New Keynesian model and use it to study how income inequality affects the monetary transmission mechanism. In the model, all households are subject to idiosyncratic productivity shocks, only partially insurable by means of  risk-free bonds, and can be one of two types: “workers”, who cannot  access the market for firm dividend claims, and “capitalists”, who  can. Under rigid prices, monetary policy affects the distribution of consumption, but it has no effect on output as workers choose not to change their hours worked in response to wage movements. In the corresponding representative-agent model, in contrast, hours do rise after a monetary policy loosening due to a wealth effect on labor supply: profits fall, thus reducing the representative worker's income. If wages are rigid too, however, the monetary transmission mechanism is active in our model and resembles that in the corresponding representative-agent model. Here, workers are not on their labor supply curve and hence respond passively to demand, and profits are procyclical.

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