Monetary policy rules and the inequality-augmented Phillips curve

Much has been written on the relationship between inflation and unemployment; however, the issue of inequality and the fact that monetary policy has an impact on inequality when attempting to influence these variables is frequently overlooked. By contrast, this paper explores the relationship between inequality, unemployment, and inflation. To do so, we extend the agent-based model of Rolim et al. (2023) and investigate the inflation-unemployment-inequality nexus, which results in the inequality-augmented Phillips curve, linking higher unemployment to lower inflation and higher inequality. We show that the decrease in low-wage workers’ bargaining power may explain the flattening of the Phillips curve and higher income and wage inequalities. In a second experiment, we find that a monetary policy rule prioritizing low inflation rates leads to higher unemployment and inequality. Overall, our results suggest that income inequality should be considered an important monetary policy dimension.