Does Monetary Policy Affect Income Inequality in the Euro Area?

Abstract

This paper examines how the ECB's expansionary monetary policy affects income inequality in 10 euro area countries over the period 1999–2014. We distinguish two channels—labor‐market and financial—through which monetary policy can have distributional effects. The labor‐market channel is captured by wages and employment and the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The labor‐market channel enhances the equalizing effect: monetary expansion reduces income inequality stronger by raising wages and employment. There is limited evidence for the financial channel.

The Heterogeneous Effects of Monetary Policy on Labor Income: Disentangling the Extensive and Intensive Margins

“…It also moderately increases the Bottom 50% share (+0.1%) while the Middle 40% shares decreases (-0.2%). Such an increase in labor income inequality following an expansionary monetary policy shock is consistent with Faia et al (2022), while some other papers find opposite effects (Coibion et al (2017), Mumtaz and Theophilopoulou (2017), Lenza and Slacalek (2023) or Samarina and Nguyen (2023)). Most of these papers use VAR estimates where the impact of monetary policy is directly estimated on a summary inequality measure (i.e.…”

“…Another strand of the literature uses summary measures of income inequality like the Gini coefficient to document the distributional effects of monetary policy (see Coibion et al (2017), Mumtaz and Theophilopoulou (2017), Furceri et al (2018), Pereira da Silva et al (2022, Creel and El Herradi (2022) and Samarina and Nguyen (2023)). Chang and Schorfheide (2022) estimate, using a functional VAR, the effect of monetary policy on the cross-sectional distribution of earnings and also highlight the role of employment dynamics for the bottom of the distribution.…”

Does monetary policy impact income inequality?

“…To contribute to this discussion, we implement a cointegrating analysis and explore heterogeneities among a set of developed economies. Samarina and Nguyen (2023) explored the spillover effects of the monetary policy of the European Central Bank on ten countries in the Eurozone. They employed a Panel Vector Autoregressive with Exogenous Variables (PVARX) model to capture these spillover effects.…”

“…Samarina and Nguyen (2023) explored the spillover effects of the monetary policy of the European Central Bank on ten countries in the Eurozone. They employed a Panel Vector Autoregressive with Exogenous Variables (PVARX) model to capture these spillover effects.…”