ABSTRACT

This study incorporates heterogeneous households into a monetary Schumpeterian growth model via menu costs to explore the effect of inflation on income inequality. The source of income inequality stems from the unequal distribution across households’ assets. Given that households face the same wage rate, inflation that leads to a monotonically decreasing effect on economic growth helps mitigate income inequality by weakening the contribution of asset income relative to wage income.

KEYWORDS

Inflation, Income inequality, Menu costs, Economic growth

JCR CLASSIFICATION

Q3

JEL CLASSIFICATION

O30, O40, E58, D30

Economics Letters

https://doi.org/10.1016/j.econlet.2019.07.009