A North-South monetary model of endogenous growth with international trade
We devise a North-South endogenous growth model
with international trade and money to study the effects of inflation
(and monetary policy) on wage inequality, specialization, and growth.
The relationship between monetary policy and wage inequality depends on
the fact that skilled-production firms are less credit constrained than
unskilled-production firms. Interestingly, inflation affects the
structure of production by increasing the production share made by
skilled-intensive firms, and decreases economic growth. Furthermore,
inflation decreases the difference of wage inequality between
countries; shrinking the skill premia difference. Moreover, inflation
and trade have opposite effects on wage inequality and on
specialization: while trade tends to decrease intra-South wage
inequality, inflation tends to increase it; while trade tends to
increase the number of different intermediate goods produced with
unskilled technology in the South; inflation acts the other way around.
Results are confirmed quantitatively.
Inflation; Wage inequality; North-South trade; CIA constraints; Technological knowledge bias