Human Capital and Income Inequality in a Monetary Schumpeterian Growth Model

This paper investigates the effects of monetary policy on income inequality in a Schumpeterian growth model with endogenous human capital accumulation and household heterogeneity. The source of heterogeneity arises from both unequal distributions of (tangible) wealth and (intangible) human capital. We find that inflation unambiguously lowers economic growth rate, whereas its impact on the income inequality is quite diverse, depending on the relative dispersions of human capital and wealth, and the response of the relative interestwage income share to inflation. Inflation may increase income inequality when the dispersion of human capital dominates (is dominated by) that of wealth, and the relative interest-wage income share is decreasing (increasing) in inflation rate. One interesting scenario in our analysis is that the model can generate a non-monotonic U-shaped relationship between income inequality and inflation. Moreover, our quantitative example shows that this U-shaped relationship is likely to occur in a reasonable range of parameter configuration and the threshold level of inflation is consistent with the current empirical findings using the U.S. data.