Federico Ravenna (Central Bank of Denmark) (Webinar)

“Inclusive Monetary Policy in a Model with Heterogeneous Workers”

Abstract. Central banks are increasingly debating monetary policies reducing inequality and ensuring employment gains are spread widely across all parts of the labor market. What are the trade-offs faced by this policy goal? What role should income inequality have among the objectives of the monetary authority? We address these questions within a model that allows for workers with different level of productivity, or skill, competing in the same job market. We assess inclusive monetary policies along a simulated conuterfactual of the COVID recession. We compare traditional and ‘inclusive’ policies in terms of their impact on earnings and employment inequality, on the labor market outcomes of lower-productivity, lower-income workers, and in terms of their inflation outcomes. Inclusive policies come at a high cost in terms of inflation, but can substantially reduce the uneven burden of a recessionary shock for the lowest-productivity workers. We provide a normative assessment, and show that while making monetary policy more inclusive is beneficial for the overall economy, making monetary policy much more inclusive results in deviations from the first best allocation.