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Abstract
We study how rising permanent labor-income inequality shapes monetary and fiscal transmission in a Heterogeneous-Agent New-Keynesian model with a non-homothetic taste for wealth. Higher inequality increases the share of hand-to-mouth households, raising aggregate MPCs and lowering the effective intertemporal elasticity of substitution. As a result, the direct effect of monetary policy weakens, while the indirect effect strengthen, leading to a larger output response. A higher share of capital gains generated by monetary policy are paid to wealthy households, making monetary policy more regressive. For fiscal policy, higher MPCs raise impact and cumulative multipliers and make deficit-financed expansions more likely to be self-financing. Finally, the fiscal response to a monetary policy shock becomes more important to determine the output response to a change in interest rate.
Citation
@techreport{ElinaHuleux2025a,
author = {Eustache Elina and Raphaël Huleux},
year = {2025},
title ={From Income to Wealth Inequality in the U.S.: General Equilibrium Matters}}