Discussion paper

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

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 income—
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.


Broer, T and E Öberg (2016), ‘DP11382 The New Keynesian Transmission Mechanism: A Heterogenous-Agent Perspective‘, CEPR Discussion Paper No. 11382. CEPR Press, Paris & London. https://cepr.org/publications/dp11382