Monetary Policy and Personal Income Distribution: A Survey of the Empirical Literature

ABSTRACT

The purpose of this paper is to conduct a survey of the recent literature that evaluates, in an empirical way, the distributional impacts of monetary policy. In the first two sessions, we discuss, respectively, the transmission channels of monetary policy to income distribution and the empirical strategies used to measure it. The majority of surveyed papers find that a contractionary monetary policy worsen the income distribution, and that an expansionist policy tends to improve it. Moreover, several papers found that the higher is the redistributive impact of fiscal policy, the lower is the impact of monetary policy on inequality. Another outcome with empirical support is the role of the labor share on total income: the higher is this share, the higher is the impact of monetary policy on inequality. The last point discussed is the asymmetric effects of contractionary and expansionary monetary policy. There is evidence that increases in interest rates have statistically significant effects on income distribution, whereas the effects of reductions in interest rates are not statistically different from zero. This empirical finding goes against the conventional view that the distributional effects of interest rate changes are temporary and likely to net out over the business cycle.

KEYWORDS:

• Monetary policy
• interest rates
• income distribution

JEL CLASSIFICATION:

• E52
• E43
• D31

Acknowledgements

The author acknowledges the helpful comments of Lilian Rolim, Louis-Philippe Rochon and the participants of the Elgar Webinar Series on Central Banking and Monetary Policy on May 18th, 2020, especially David Leadbeater, Mario Seccareccia and Joelle Leclaire, as well as those of two anonymous referees.

Disclosure Statement

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

Notes

1 To give some numerical examples, Ampudia et al. (2018, p. 9) shows that 85% of mortgagors in Germany have a fixed rate mortgage. In Spain, this proportion is less than 20 per cent. Those differences might affect the relative importance of this channel.

2 Other examples are Claeys et al. (2015), O’Farrell, Rawdanowicz, and Inaba (2016), Domanski, Scatigna, and Zabai (2016), and Haldane (2018).

3 Expansionary policy being considered a reduction in the base interest rate, and a contractionary policy is an increase in this rate.

4 Therefore, the (expansionary decreases/contractionary increases) pair relates to studies that found that and expansionary monetary policy decreases income inequality, and/or that a contractionary monetary policy increases income inequality. The opposite applies to the (expansionary increases/contractionary decreases) pair.

5 For evidence of a general asymmetric effect of monetary policy, see Morgan (1993), Karras (1996) and Tenreyro and Thwaites (2013).

6 Recent efforts in this direction are Ume and Williams (2019) and Bartscher et al. (2021) for race and Grazzini and Kim (2020) for gender.