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On the Effects of Monetary Policy Shocks on Earnings and Consumption Heterogeneity

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  • Schorfheide, Frank
  • Chang, Minsu

Abstract

In this paper we use the functional vector autoregression (VAR) framework of Chang, Chen, and Schorfheide (2021) to study the effects of monetary policy shocks (conventional and informational) on the cross-sectional distribution of earnings and consumption. We find that an expansionary monetary policy shock reduces earnings inequality. The reduction is generated by what we call the employment channel. In the left tail of the earnings distribution, the expansion lifts individuals out of unemployment and thereby reduces the earnings dispersion. For consumption we obtain the opposite result: the expansionary policy shock raises the mass in the right tail of the consumption distribution, thereby increasing consumption inequality.

Suggested Citation

  • Schorfheide, Frank & Chang, Minsu, 2022. "On the Effects of Monetary Policy Shocks on Earnings and Consumption Heterogeneity," CEPR Discussion Papers 17049, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17049
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    More about this item

    Keywords

    Consumption distribution; Earnings distribution; Functional vector autoregressions; Heterogeneous agent models; Monetary policy shocks;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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