Money, Exchange rate and Wage Inequality

Ganguly, Shrimoyee (2023): Money, Exchange rate and Wage Inequality.

Abstract

In the existing literature, several channels have been suggested for the effects of monetary policy on income inequality. This paper explores an altogether different channel by examining the effect of an expansionary monetary policy on wage inequality between skilled and unskilled workers in a competitive general equilibrium framework of a small open economy. This issue assumes relevance since monetary policies are often pursued by the central banks to manage exchange rate fluctuations under a managed float regime, which may adversely affect the wages to low skilled workers. Under optimal allocation of wealth over a portfolio of cash, domestic assets and foreign assets, we show that an increase in the domestic money supply affects the wage inequality primarily in two ways. One is through larger investment, capital formation and consequent endowment effect; the other is through changes in the nominal exchange rate. Expansionary monetary policy aggravates wage inequality if the labour to capital share required to produce the traditional export good exceeds that needed in the skill-based export good. A contractionary monetary policy in the foreign country on the other hand, minimises wage inequality if the capital-cost share in the export good Z is highest followed by that in the composite traded good and that in the non-traded good is least.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary Policy, Wage inequality, Employment, Exchange rate, Portfolio choice.
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F1 - Trade > F11 - Neoclassical Models of Trade; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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