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Abstract
This paper analyzes the relationships between monetary policy and income inequality in Korea. We calculate Gini coefficient for various income range using data from the Household Income and Expenditure Survey and then estimate a block-exogeneity VAR representing Korean and US economies to examine the effects of monetary policies on income inequality. The results show that following a one-standard deviation contractionary (expansionary) monetary policy shock, market income Gini coefficient increases (decreases) significantly after one year, reaching its peak to 0.0014 (0.14%p) while GDP and CPI decrease (increase) significantly by 0.48% and 0.15%, respectively. The contributions of monetary policy shocks to income inequality are found to be small as shown by forecast error variance and historical decompositions. In addition, earnings heterogeneity channel is most important among various channels through which monetary policy affects income inequality. Finally, a counterfactual analysis implies that if Bank of Korea held the call rate constant at 5.13% from 2008:Q3 and thereafter, the average of market income Gini coefficient would be higher by 0.009 (0.9%p) during 2008:Q4–2015:Q1 under the assumption of static expectations.
Acknowledgements
I thank Sungju Song, Hwan-Koo Kang, Seungyoon Lee, Sang-yoon Song, and anonymous referees for helpful comments. I am also grateful to seminar participants at Bank of Korea. The views expressed in this paper are those of the author and do not necessarily reflect the official view of the Bank of Korea.
Notes
1 The former president of FRB Dallas Richard Fisher argued at London School of Economics on 24 March, 2014 (http://www.valuewalk.com/2014/03/dallas-fed-president-says-qe-massive-gift-wealth/).
2 In addition, they find that the procyclical responses of inequality to monetary shocks have been reduced after 2000 and account for this by the change in the labor market flexibility.
3 Also they find that the effect is larger in countries with higher labor share of income and smaller redistribution policies and that changes in policy rates driven by an increase in growth are associated with lower inequality.
4 They assume that the yield on long-term government bonds would be higher than the short-term rate by 100 basis points without the program.
5 There are at least two channels through which monetary policy shocks affect wealth inequality. First, financial segmentation channel assumes that a central bank injects money supply into the economy through financial markets and that the households that are most connected to financial markets are likely to be rich. Under these assumptions money supply injected by expansionary monetary policy shocks flows to toward those rich households and so the shocks widen wealth inequality. Second, portfolio channel (inflation tax channel) also implies that expansionary monetary policy shocks increase wealth inequality since poor households tend to hold a large fraction of their wealth as currency whose real value is vulnerable to inflation.
6 Literature tends to consider only heterogeneity in labor earnings when defining the earnings heterogeneity channel. But in this paper, we define the earnings heterogeneity channel broadly by including heterogeneity in business income.
7 The raw data can be downloaded from the website of MDIS (MicroData Integrated Service): https://mdis.kostat.go.kr/index.do.
8 For example, Survey on Labor Conditions by Employment Type, KLIPS, and income tax statistics include income data.
9 See Appendix 7 for some characteristics of samples.
10 Business income includes business and rental incomes. Financial income includes interest, dividend, and other financial incomes. Private transfer income includes transfers between households, discounts, and other transfer income.
11 See Appendix 8 for sources of macroeconomic variables.
12 As an anonymous referee suggests, it is possible that the estimation results depend on the sample periods since the economic environments including monetary policy framework in Korea have changed after experiencing 1997 Crisis. For the robustness check, we add the dummy variable taking the value of 1 for the periods until 1998 as an explanatory variable. Some key estimation results are provided in Appendix 10. Two differences are noteworthy. First, as shown in Panel (b) of , the response of market income Gini coefficient is more persistent. Second, as described in , the contribution of monetary policy shocks to income inequality becomes smaller. However, overall, these results do not affect our key conclusions.
13 See Appendix 9 for details and results.
14 The standard deviation of estimated monetary policy shock is 1.00.
15 Due to the block-exogeneity restriction, US variables do not respond to Korean monetary policy shocks and so their responses are not shown.
16 In terms of magnitudes, the responses of output and price are small compared to previous literature. One reason for these weak responses is that the response of the call rates to a 100 bp monetary policy shock is less than 100 bp due to the contemporaneous response of other variables. Also the number of variables and structural shocks in our model is relatively large and so the effect of each shock cannot be large. Finally, under the block-exogeneity restriction, the effect of domestic shocks would be small.
17 For instance, Coibion et al. (Citation2017) document that a 100 bp contractionary monetary policy shock increases the income Gini coefficient by 0.01.
18 Since there are nine shocks, the contribution of each shock would be about 11% if each shock equally contributes to market income Gini coefficient.
19 We use the gap between the change rates in the market income as a measure for the degree of inequality since it is harder to decompose market income Gini coefficients. As seen below, the response of the gap between the change rates in the market income is similar to that of market income Gini coefficient.
Additional information
Notes on contributors
Jongwook Park
Jongwook Park is an Economist at Research Department, Bank of Korea, Seoul. His research interests include monetary and fiscal policies.