DP11382 The New Keynesian Transmission Mechanism: A Heterogenous-Agent Perspective

Author(s): Tobias Broer, Niels-Jakob Harbo Hansen, Per Krusell, Erik Öberg
Publication Date: July 2016
Keyword(s): Heterogeneous Agents, inequality, Monetary Transmission, New Keynesian Model
JEL(s): E31, E32, E52
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11382

We argue that a 2-agent version of the standard New Keynesian model - where a 'worker'? receives only labor income and a'capitalist'? only profit ncome - offers insights about how income inequality affects the monetary transmission mechanism. 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 representativeagent 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 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.