Monetary Policy and the Top One Percent: Evidence from a Century of Modern Economic History

Abstract

While a growing line of research has assessed the distributional consequences of monetary policy, most of these studies rely on survey-based estimates of inequality and feature a shorter time coverage. This paper examines the distributional implications of monetary policy on top income shares in 12 advanced economies between 1920 and 2015. We exploit the implications of the macroeconomic policy trilemma with an external instrument approach to identify exogenous variations in monetary conditions. The obtained results indicate that contractionary monetary policy strongly decreases the share of national income held by the top one percent and vice versa, irrespective of the state of the economy. Our findings also suggest that the effect of monetary tightening on top income shares is likely to be channeled via lower asset prices.

Finance‐inequality Nexus: The Long and the Short of It

“…As a corollary, these results suggest also that the positive effect of an innovation in financial development on income distribution lasts less than 5 years. This is consistent with the length of the period estimated by El Herradi and Leroy (2019) for the peak positive effect of a monetary expansion on the share of national income held by the wealthy.…”

“…If it is the improved availability of credit to the poor that drives the income‐inequality reducing effect of monetary policy, as in Doepke and Schneider (2006), then our findings emphasize the short‐lived nature of this effect, with a reversal within a few years (below we demonstrate the effect disappears once one moves to 5‐year averages). Regarding the longer‐term “inequality‐increasing” effect through asset price dynamics, as in El Herradi and Leroy (2019), our findings support such directionality in the long run, yet suggest it may be not only the increased income from asset holding but also a more general improvement in the income opportunity set of the rich that drives the effect.…”

“…In Section II we reviewed the growing field of research on the distributional effects of monetary policy, which offers a mixed view: some find monetary expansions reduce inequality (Doepke and Schneider 2006; Mumtaz and Theophilopoulou 2017); Furceri, Loungani, and Zdzienicka 2018), while others find expansions favor the rich, at least in the medium and long run (El Herradi and Leroy 2019). In our data, we cannot easily distinguish between monetary policy effects (whereby monetary expansion may boost credit, and thus affect our measure of financial development) and other factors (such as technological) of financial development.…”

“…Effects of monetary policy shocks, however, seem to be different in the short and the long run, in a similar manner to the intertemporal effects we advocate for financial development. In El Herradi and Leroy (2019), unlike the above studies, monetary expansion benefits the rich disproportionately more than the poor; the effect is visible in the medium run and works through the asset price channel. Colciago, Samarina, and de Haan (2019) survey the literature on the distributional effects of central bank policies; they highlight the mixed evidence from various studies and explain this, at least in part, by the multiplicity of channels through which monetary policy may affect income (and wealth) inequality.…”

Knowledge Problems with Discretionary Monetary Policy

“…Without a shared understanding of how financial market developments ought to enter into the monetary policy reaction function, communicating to the public about the role of financial-stability considerations could create more problems than it solves. (Federal Reserve 2014b, p. 31) Each unofficial objective that enters into the analysis of discretionary central bankers surely has trade-offs against long-run price stability or other unofficial and official objectives (El Herradi and Leroy 2019;Ferguson 2003;Issing 2003;Jordà et al 2015;Saiki and Frost 2014;Shukayev and Ueberfeldt 2018;Smets 2013).…”