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The impact of inequality on the transmission of monetary policy

Author

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  • Voinea, L.
  • Lovin, H.
  • Cojocaru, A.

Abstract

We consider a model to detect the relation between household debt and the transmission of monetary policy in an EU Member State with independent monetary policy and high income inequality (Romania). We find that households response to changes in monetary conditions depends on their income and indebtedness profile. The transmission of monetary policy is more effective for middle income households, which are more indebted and have adjustable rates, as lower policy rates ease the consumption constraints on these households. Low income households respond mainly to budgetary policies, as the increase in disposable income matters most for the bottom quintile. Top income quintile reacts more to monetary policy than bottom quintile, but less than middle income quintiles. Lower inequality is associated with stronger effectiveness and higher homogeneity of monetary policy transmission; in turn, higher inequality is associated with less effectiveness and higher heterogeneity of the impact of the monetary policy.

Suggested Citation

  • Voinea, L. & Lovin, H. & Cojocaru, A., 2018. "The impact of inequality on the transmission of monetary policy," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 236-250.
  • Handle: RePEc:eee:jimfin:v:85:y:2018:i:c:p:236-250
    DOI: 10.1016/j.jimonfin.2017.11.007
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    References listed on IDEAS

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    Cited by:

    1. Andrea Colciago & Anna Samarina & Jakob de Haan, 2018. "Central bank policies and income and wealth inequality: A survey," DNB Working Papers 594, Netherlands Central Bank, Research Department.
    2. repec:eee:jmacro:v:58:y:2018:i:c:p:292-307 is not listed on IDEAS

    More about this item

    Keywords

    Inequality; Monetary policy; Consumption; Household debt; Disposable income; Romania;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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