You are here

The labor share and the monetary transmission

João Gama
André Silva
Publication Year 
JEL Code 
C6 - Mathematical Methods and Programming
E3 - Prices, Business Fluctuations, and Cycles
E4 - Money and Interest Rates
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
We show that the effectiveness of monetary policy changes with the labor income share. We do this in the context of a continuous time cash-in-advance model with heterogeneous agents and market segmentation. It turns out that the current price level depends on future interest rates through an integral equation. The solution of this integral equation reveals that, after an increase in interest rates, a larger income share implies larger reductions in money, prices and inflation. Monetary policy is more powerful in countries with a higher labor income share.
Document link