Job market paper
Abstract
We study how rising permanent labor income (PLI) inequality changes the transmission of monetary and fiscal policy. Standard heterogeneous-agent models imply that hand-to-mouth status is unrelated to permanent income, and that the PLI distribution is therefore neutral. In the PSID, instead, the hand-to-mouth share falls from 64% to 22% across PLI quintiles, a gradient that has steepened since 1999. A model with a non-homothetic taste for wealth reproduces these facts and breaks the neutrality. The incidence of fiscal policy becomes a first-order determinant of the output response: the same deficit stimulates or contracts output depending on who receives and who repays it. For monetary policy, the effect of a rate cut depends on how the government rebates its interest savings. The rise in PLI inequality since 1970 also raised the aggregate MPC from 0.30 to 0.36, strengthened tax-financed fiscal packages while weakening transfer-financed ones, and made monetary policy slightly stronger, more regressive, and more dependent on the fiscal rule.
Citation
@techreport{ElinaHuleux2026a,
author = {Eustache Elina and Raphaël Huleux},
year = {2026},
title = {Permanent Labor Income Inequality and Stabilization Policies}}