Wage Rigidities, Monetary Policy and Inequality: Insights from a three-agent New Keynesian model

Sammanfattning: In this thesis, I use a three-agent New Keynesian (THRANK) dynamic stochastic general equilibrium model, which features poor-, wealthy- and non-hand-to-mouth (HtM) households. I augment the model by introducing nominal wage rigidities to account for empirical evidence regarding wages and profits. I find that following an expansionary monetary policy shock, the dampened increase in real wages causes the consumption responses of wealthy- and especially poor-HtM households to decline relative to the baseline model. Furthermore, the sign of the profit response reverses when wages are sticky, which increases non-HtM household income compared to the flexible wage model. As a result, redistribution from low-MPC to high-MPC households decreases, suggesting lower amplification compared to the baseline THRANK model. At the same time, rigid wages dampen the aggregate inflation response, resulting in persistently lower nominal interest rates, which increases non-HtM consumption through the intertemporal substitution channel. Thus, when nominal wages are present in the THRANK model, the aggregate output response can be similar to the flexible wage model, whereas the underlying transmission and redistribution channels differ.