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Monetary policy and earnings inequality: inflation dependencies

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  • Jaanika Meriküll
  • Matthias Rottner

Abstract

This paper studies the distributional effects of monetary policy and its dependence on inflation. We document a novel dependency in the earnings heterogeneity channel of monetary policy using high-frequency, administrative tax data from eurozone member Estonia. Monetary policy shocks substantially influence earnings inequality during high-inflation periods, with weaker effects during low-inflation periods. Extending our dataset with granular MPC estimates, we show that earnings heterogeneity amplifies the aggregate MPC and consumption response. In high-inflation periods, consumption and inequality respond more, even though the aggregate MPC may be lower. We rationalise our findings with a nonlinear tractable HANK model featuring inflation dependencies.

Suggested Citation

  • Jaanika Meriküll & Matthias Rottner, 2025. "Monetary policy and earnings inequality: inflation dependencies," BIS Working Papers 1271, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1271
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    More about this item

    Keywords

    monetary policy; labour income inequality; inflation; state dependency; earnings heterogeneity channel; aggregate MPC;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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