The impact of monetary policy on inequality in the UK. An empirical analysis

Abstract

The UK has experienced a dramatic increase in earnings and income inequality over the past four decades. We use detailed micro level information to construct quarterly historical measures of inequality from 1969 to 2012. We investigate whether monetary policy shocks played a role in explaining this increase in inequality. We …nd that contractionary monetary policy shocks lead to an increase in earnings, income and consumption inequality and contribute to their ‡uctuation. The response of income and consumption at di¤erent quantiles suggests that contractionary policy has a larger negative e¤ect on low income households and those that consume the least when compared to those at the top of the distribution. Our evidence also suggests that the policy of quantitative easing may have contributed to the increase in inequality over the Great Recession.

Central Bank Policies and Income and Wealth Inequality: A Survey

“…Besides finding a suitable inequality measure, empirical studies need to address the issue of measuring and identifying monetary policy shocks. Conventional monetary policy is commonly proxied by short‐term or policy interest rates (e.g., Coibion et al ., ; Mumtaz and Theophilopolou, ; Furceri et al ., ). Measures used for unconventional monetary policy are central bank assets (Saiki and Frost, ; Guerello, ), government bond spreads (Mumtaz and Theophilopolou, ), or a shadow rate (Inui et al ., ) .…”

“…It is used to examine the dynamic reactions of income and wealth inequality to a monetary policy shock. For this purpose, studies estimate VAR models and construct impulse responses of inequality to a monetary policy shock (e.g., Saiki and Frost, ; Mumtaz and Theophilopoulou, , ; Guerello, ) or use local projections to produce impulse responses (Coibion et al ., , Inui et al . ; Furceri et al ., ) .…”

“…Several papers find that contractionary monetary policy, by raising interest rates, increases income and earnings inequality in the USA (Coibion et al ., ; Aye et al ., ), the UK (Mumtaz and Theophilopoulou, , ), the euro area (Guerello, ; Samarina and Nguyen, ), and in a panel of advanced and emerging countries (Furceri et al ., ). Monetary contraction depresses economic activity, employment, and wages, notably hurting low‐income households for which labor earnings constitute the main income source.…”

“…In contrast, the income composition channel suggests that unconventional policy increases income inequality: by boosting asset prices, capital income of the rich increase, and income inequality rises . Evidence in support of this view is reported for Japan (Saiki and Frost, ; Taghizadeh‐Hesary et al ., ), the USA (Montecino and Epstein, ; Juan Francisco et al ., ), and the UK (Mumtaz and Theophilopoulou, ).…”

Austerity, inequality, and private debt overhang

“…These channels are found to be important in explaining the distributional consequences of monetary policy shocks by Coibion, Gorodnichenko, Kueng, and Silvia (2012 Anderson, Inoue, andRossi 2016, andMumtaz andTheophilopoulou 2016), and fiscal consolidations, in particular (see, e.g., Agnello andSousa 2014 andBall, Furceri, Leigh, andLoungani 2013). However, none of these studies allows the effects to differ according to the state of the credit cycle.…”