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Monetary policy shocks and labour-income inequality in Mexico

Villarreal, Francisco G. (2014): Monetary policy shocks and labour-income inequality in Mexico.

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Despite growing interest regarding the distributive impact of macroeconomic policies, the relationship between monetary policy and inequality has received relatively little attention in the literature. This is partly explained by the fact that the workhorse model used for monetary policy analysis summarises the demand-side of the economy by means of a representative agent, whose welfare is the normative criterion of optimal policy. However, alternative formulations using incomplete market models which feature heterogeneous agents, indicate that monetary policy does have an effect on the distribution of income, consumption and wealth, which potentially has implications for the design and conduct of optimal policy. The document empirically investigates the nature of the relationship between monetary policy and household's labour income inequality in Mexico. The results indicate that inequality of aggregate household's labour-income increases as a result of an unanticipated increase in nominal interest rate. However, the result is differentiated across labour markets, as well as across the distribution of income, with inequality declining among households in the bottom half of the distribution, whose head is employed in the informal labour market. The findings are robust to the particular measure of inequality used, as well as the procedure used to identify the policy shocks.

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