DP14118 Capital and Income Inequality: An Aggregate-Demand Complementarity

Author(s):	Florin Ovidiu Bilbiie, Diego R Känzig, Paolo Surico
Publication Date:	November 2019
Date Revised:	December 2020
Keyword(s):	aggregate demand, Capital, Complementarity, Heterogeneity, Income inequality, monetary policy, multiplier
JEL(s):	E21, E22, E32, E44, E52
Programme Areas:	Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=14118

A novel complementarity between capital and income inequality leads to a significant amplification of the effects of monetary policy on consumption. We characterize this finding analytically and quantitatively, using a model with heterogeneity in household saving and income, nominal rigidities, and capital. A fiscal policy that redistributes capital income causes further amplification, whereas redistributing profits generates dampening.