Moving Closer or Drifting Apart: Distributional Effects of Monetary Policy

Abstract

The heating debate about increasing income inequality forces monetary policy makers and academia to (re‐)assess the nexus between (unconventional) monetary policy and inequality. We use a VAR framework to unveil the distributional effects of monetary policy and the role of redistribution in six advanced economies. While all of them experience an increase in Gini coefficients of gross income due to an expansionary monetary policy shock, only countries with relatively little redistribution display a significant response of net income inequality as well. To examine the underlying transmission channels we take a closer look at the sources of income, i.e. labor and capital income. Our findings suggest that the disproportional surge in capital income is the driving force behind the increase in net income inequality.

The Distributional Impact of Monetary Policy Easing in the UK between 2008 and 2014

“…Turning back to the US, Davtyan (2017) and Hafemann et al (2017) find effects of the opposite sign, with lower policy rates increasing income inequality. Inui et al (2017) also find that lower policy rates increased income inequality in Japan before the 2000s, but they find no significant impact over their full sample period .…”

Does monetary policy impact income inequality?

“…These fluctuations can, in turn, lead to changes in inequality. Hafemann et al (2018) argued that expansionary monetary shocks lead to an increase in inequality as measured by the Gini coefficient. One limitation of the study conducted by Hafemann et al (2018) is their utilization of the VAR model.…”

“…Hafemann et al (2018) argued that expansionary monetary shocks lead to an increase in inequality as measured by the Gini coefficient. One limitation of the study conducted by Hafemann et al (2018) is their utilization of the VAR model. The authors employed variables from relevant economies to represent the international economic scenario.…”

“…Hafemann et al . (2018) argued that expansionary monetary shocks lead to an increase in inequality as measured by the Gini coefficient.…”

How does monetary policy affect income and wealth inequality? Evidence from quantitative easing in the euro area

“…The eect is asymmetrictightening of policy raises inequality more than easing lowers itand depends on the state of the business cycle. Hafemann et al (2017) estimates the eects of monetary policy on income inequality in 3 Aladangady (2014) and Aladangady (2017) estimate the eects of monetary policy on house prices and eventually household consumption in the US using a two-step procedure combining a structural VAR with regional data and micro data from the CEX.…”