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Monetary Policy and Inequality: How Does One Affect the Other?

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Abstract

This study investigates the relation between monetary policy and income inequality by asking how one affects the other: the effect of monetary policy on income inequality and the impact of the long-run level of income inequality on the effectiveness of monetary policy. To this end, I build a heterogeneous-agent New Keynesian economy with indivisible labor in which both macro and micro labor supply elasticities are endogenously generated. I find that monetary policy shocks have distributional consequences due to a substantial heterogeneity in labor supply elasticity across households. I also show that a more equal economy is associated with more effective monetary policy in terms of output since it generates a larger aggregate elasticity of labor supply, thereby having a flatter New Keynesian Philips curve. Empirical evidence based on state-level panel data supports this model result.

Suggested Citation

  • Eunseoung Ma, 2020. "Monetary Policy and Inequality: How Does One Affect the Other?," Departmental Working Papers 2020-02, Department of Economics, Louisiana State University.
    • Handle: RePEc:lsu:lsuwpp:2020-02
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    2. Fierro, Luca Eduardo & Giri, Federico & Russo, Alberto, 2023. "Inequality-constrained monetary policy in a financialized economy," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 366-385.
    3. Jérôme Creel & Mehdi El Herradi, 2024. "Income inequality and monetary policy in the euro area," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 332-355, January.
    4. Mäki-Fränti, Petri & Silvo, Aino & Gulan, Adam & Kilponen, Juha, 2022. "Monetary policy and inequality: The Finnish case," Bank of Finland Research Discussion Papers 3/2022, Bank of Finland.
    5. Maliar, Lilia & Naubert, Christopher, 2025. "Monetary policy transmission with endogenous central bank responses in TANK," Journal of Economic Dynamics and Control, Elsevier, vol. 178(C).
    6. Christoph Lauper & Giacomo Mangiante, 2021. "Monetary policy shocks and inflation inequality," Cahiers de Recherches Economiques du Département d'économie 21.02a, Université de Lausanne, Faculté des HEC, Département d’économie.
    7. Evgenidis, Anastasios & Fasianos, Apostolos, 2023. "Modelling monetary policy’s impact on labour markets under Covid-19," Economics Letters, Elsevier, vol. 230(C).
    8. Makram El-Shagi & Steven Yamarik, 2024. "The Effect of Monetary Policy Shocks on Income Inequality across US states," CFDS Discussion Paper Series 2024/4, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    9. Capazario, Michele, 2022. "Developing an Income-Distribution- Sensitive Taylor Rule: An Application to South Africa," MPRA Paper 112740, University Library of Munich, Germany.
    10. David G Blanchflower & Alex Bryson, 2024. "Were COVID and the Great Recession well-being reducing?," PLOS ONE, Public Library of Science, vol. 19(11), pages 1-34, November.
    11. Ma Eunseong & Park Kwangyong, 2025. "Gini in the Taylor Rule: Should the Fed Care About Inequality?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 25(1), pages 241-285.
    12. Hayo, Bernd, 2023. "Does the ECB's monetary policy affect personal finances and economic inequality? A household perspective from Germany," Economic Modelling, Elsevier, vol. 129(C).
    13. Emira Arefa Aji & Raditya Sukmana, 2023. "Dual Monetary Policy and Income Inequality in Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 26(3), pages 539-560, September.
    14. Bobasu, Alina & Repele, Amalia, 2025. "Effects of monetary policy on labor income: the role of the employer," Working Paper Series 3046, European Central Bank.
    15. Frantisek Masek & Jan Zemlicka, 2024. "Average Inflation Targeting: How far to look into the past and the future?," Working and Discussion Papers WP 5/2024, Research Department, National Bank of Slovakia.
    16. Do, Yeongwoong, 2025. "Effects of monetary policy on the wealth inequality," Economics Letters, Elsevier, vol. 255(C).
    17. Gerke, Rafael & Giesen, Sebastian & Lozej, Matija & Röttger, Joost, 2024. "On household labour supply in sticky-wage HANK models," Discussion Papers 01/2024, Deutsche Bundesbank.
    18. Cho, Daeha & Ma, Eunseong, 2023. "The heterogeneous welfare effects of business cycles," European Economic Review, Elsevier, vol. 153(C).
    19. Domonkos, Tomas & Fisera, Boris & Siranova, Maria, 2023. "Income inequality as long-term conditioning factor of monetary transmission to bank rates," Economic Modelling, Elsevier, vol. 128(C).
    20. Eunseong Ma, 2025. "Intensive and Extensive Margins of Labor Supply in HANK: Aggregate and Disaggregate Implications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 57(6), pages 1657-1683, September.
    21. Okan Akarsu & Emrehan Aktug & Muserref Kucukbayrak, 2025. "Hand-to-Mouth Households in the Eurosystem and the Transmission of Monetary Policy," Working Papers 2506, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    22. Elton Beqiraj & Stefano Di Bucchianico & Mario Di Serio & Michele Raitano, 2026. "The effects of monetary policy shocks on wage inequality: evidence from Italy," Working Papers in Public Economics 270, Department of Economics and Law, Sapienza University of Rome.

    More about this item

    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
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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