On the Distributional Effects of Conventional Monetary Policy and Forward Guidance

This paper investigates the distributional effects of conventional monetary policy and forward guidance. Using a structural VAR model, we estimate their impact on macroeconomic aggregates and consumption inequality in the United States. While aggregate real and financial variables respond similarly to both policy tools, their effects on consumption inequality diverge significantly. Conventional monetary policy shocks lead to countercyclical inequality, whereas forward guidance announcements result in a procyclical response, driven by heterogeneous reactions across the household spending distribution. We rationalize these contrasting outcomes both empirically and through a tractable New Keynesian model featuring household heterogeneity and government redistribution. In the model, a fiscal adjustment that differs in timing and magnitude induces a sharper decline in consumption among financially constrained households following conventional rate hikes but a more muted effect under forward guidance. These findings highlight the importance of accounting for the distributional consequences of different monetary policy tools and emphasize the critical role of fiscal policy in shaping inequality dynamics.