Distributional impact of monetary policy in the UK: from conventional to unconventional policy

ABSTRACT

We evaluate the income distributional effect of monetary policy in the UK for the period 1993–2019 using a mixed frequency approach and a high-frequency identification. Our results indicate that expansionary monetary policy increased income inequality during the unconventional policy subperiod 2009–2019. Looking at the income brackets, we find that this increase in inequality is primarily due to the positive impact of expansionary policy on the upper share of income distribution. Our counterfactual analysis reveals that unconventional monetary policy contributed to the increase in inequality and that the response to COVID-19 is likely to do the same.

KEYWORDS:

• Monetary policy
• identification
• distribution channels
• income inequality

Subject classification codes:

• C32
• D31
• E52

Acknowledgements

We thank the editor, Judith Clifton, the associate editors, Philip Arestis and Salvador Perez-Moreno, and the two anonymous referees for their detailed comments and recommendations. We also gratefully acknowledge helpful comments and suggestions from Juan Dolado, Helmut Lütkepohl, and the participants of the SAEe symposium in Alicante, the Eighth ECINEQ Meeting in Paris School of Economics, and the Workshop in Time Series Econometrics at the University of Zaragoza.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary material

Supplemental data for this article can be accessed here.

Notes

1. Cesa-Bianchi, Thwaites, and Vicondoa (2020) consider the period 1993:M1 – 2015:M1 in the working paper version of their analysis. We think it is safer to consider this period because the policy of inflation targeting was adopted in the UK in 1993:M10. Therefore, we consider the period 1993:M1 – 2015:M1 in our analysis.

2. In parentheses, the abbreviations of the variables are indicated as they are used in the empirical analysis. The last letter L in the abbreviations indicates the natural logarithmic transformation.

3. The results with different lag specifications are available on request.

4. Mumtaz and Theophilopoulou (2015) use quarterly data in their analysis.

5. The capital letter in the number of the figure indicates that the figure is provided in Online Appendix.

6. Unless otherwise stated, the VAR model is estimated in levels with two lags and a constant, and the monetary policy shock is identified using the series of monetary policy surprises as an external instrument for the policy shock.

7. Mumtaz and Theophilopoulou (2015) consider a contractionary monetary policy shock while we keep the shock as expansionary for the comparability across our results. In these estimations, we assume a symmetry in the responses to the contractionary and the expansionary monetary policy shock.

8. The income shares are from the World Inequality Database. Though the data are based on pre-tax income, they are still informative for the evaluation of the effect of monetary policy on the different parts of income distribution.

Additional information

Funding

This work was supported by Universitat Ramon LLull under Grant 2018-URL-IR2nQ-040 ; Banco Sabadell and AGAUR-Generalitat de Catalunya [SGR 640];