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The effects of monetary policy shocks on inequality

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  • Furceri, Davide
  • Loungani, Prakash
  • Zdzienicka, Aleksandra

Abstract

This paper provides new evidence of the effect of conventional monetary policy shocks on income inequality. We construct a measure of unanticipated changes in policy rates—changes in short-term interest rates that are orthogonal to unexpected changes in growth and inflation news—for a panel of 32 advanced and emerging market countries over the period 1990–2013. Our main finding is that contractionary monetary policy shocks increase income inequality, on average. The effect is asymmetric—tightening of policy raises inequality more than easing lowers it—and depends on the state of the business cycle. We find some evidence that the effect increases with the share of labor income and is mitigated by redistribution policies. Finally, while an unexpected increase in policy rates increases inequality, changes in policy rates driven by an increase in growth and inflation are associated with lower inequality.

Suggested Citation

  • Furceri, Davide & Loungani, Prakash & Zdzienicka, Aleksandra, 2018. "The effects of monetary policy shocks on inequality," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 168-186.
  • Handle: RePEc:eee:jimfin:v:85:y:2018:i:c:p:168-186
    DOI: 10.1016/j.jimonfin.2017.11.004
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    Keywords

    Monetary policy; Monetary policy shocks; Income inequality;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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