From Policy to Paycheck: How Interest Rates Shape Wages In a Model With Evolving Demand and Technologies

In this paper, I examine the effects of monetary policy on income inequality through the lens of a multi-sector general equilibrium model with technological progress and changing demand in the US over the period of 1989-2021. Production is based on a constant relative elasticity of substitution (CRESH) function, which allows for different elasticities of substitution between capital and routine and non-routine labour. Results from the counterfactual analysis show a symmetric relationship between capital prices and wages: a 10% increase(decrease) in capital prices leads to an approximately 10% increase(decrease) in wages across sectors. Lower capital prices are associated with lower income inequality, captured by the coefficient of variation (CV). In 2021, in the counterfactual where capital prices are lower by 10%, the CV is almost 50% lower.