Journal of Macroeconomics
We provide evidence that higher wealth inequality between households is associated with stronger real effects of monetary policy. First, we use state-dependent local projections to show that the US and the UK exhibited stronger real effects of monetary policy in times of higher wealth inequality. Second, we measure wealth inequality within US states and document that economic activity responds more strongly to interest rate changes in states where wealth is distributed more unequally. Third, we show that ECB monetary policy has stronger real effects in Euro Area countries with higher wealth inequality.
We study the role of entrepreneurs for the transmission of monetary policy to aggregate investment. To this end, we develop a HANK model with entrepreneurs who invest in private firms with risky returns. The model matches the distribution of private business returns over owners’ net worth observed in the Survey of Consumer Finances. This is important because a lower return premium over the risk-free rate leads to stronger portfolio rebalancing towards the private business in response to expansionary monetary policy. Entrepreneurs are quantitatively important for the transmission of monetary policy. If they do not react to the change in the interest rate, the output response is more than 30% smaller. A shift of wealth from workers to entrepreneurs as observed in the US since the 1980s, strengthens the real effects of monetary policy.
presented at: Midwest Macro 2023, EEA 2021, EEA 2020, VfS 2020
I argue that borrowing constraints are important for understanding the welfare and output consequences of labor market polarization. I document empirically that i) a large fraction of routine workers who switched to manual and abstract occupations suffered short-term wage losses, ii) one third of routine workers are hand-to-mouth (hold few liquid assets), and iii) being hand-to-mouth predicts a low probability of leaving routine occupations. I build a general equilibrium incomplete markets model featuring three occupations, a continuum of skill types, occupation-specific human capital and a realistic share of hand-to-mouth households. A fall in the price of capital causes the routine wage to decline relative to wages in the other occupations. The presence of a large share of households close to the borrowing constraint inefficiently protracts the reallocation of labor away from the declining routine occupation. Policies that alleviate the borrowing constraint upon switching the occupation raise social welfare and output, speeding up the reallocation of workers away from the declining routine occupation. While disadvantageous for the high-skilled, the policies benefit medium- and low-skilled workers.
presented at: VfS 2021, Vigo Workshop on Dynamic Macroeconomics 2021, CEF 2021, Bonn-Mannheim PhD Workshop 2020