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Monetary policy, household inequality, and the redistribution channel in India

Author

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  • Kumar, Rahul
  • Rao, D. Tripati

Abstract

We examine the effect of monetary policy shocks (MPS) on household inequality in India using Consumer Pyramid Household Survey data from 2014 to 2022. Using Jordà’s local projections, we find that MPS affect income and consumption inequality asymmetrically, as contractionary MPS increase inequality while expansionary MPS have mixed effect. Large MPS have more pronounced effect on households' inequality than small MPS, highlighting the nonlinear effect of MPS on inequality. Further, contractionary MPS affect household income through earnings heterogeneity and income composition channels. The operating substitution and aggregate wealth channels of monetary policy affect consumption expenditure among households of different income strata. Since contractionary MPS aggravate inequality significantly, central banks in EMEs, as in India, focusing on price stability may also need to nuance the size and timing of the MPS. Concurrently, the distributional consequences of monetary policy should be monitored; however, rather than being directly targeted by central banks, they should be addressed by apposite and well-designed income-support fiscal policy measures.

Suggested Citation

  • Kumar, Rahul & Rao, D. Tripati, 2026. "Monetary policy, household inequality, and the redistribution channel in India," The Journal of Economic Asymmetries, Elsevier, vol. 33(C).
    • Handle: RePEc:eee:joecas:v:33:y:2026:i:c:s1703494926000125
    DOI: 10.1016/j.jeca.2026.e00460
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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