Moving Closer or Drifting Apart: Distributional Effects of Monetary Policy

Our paper picks up the current controversial debate about increasing (income) inequality due to recent monetary policy measures in major advanced economies. We use a VAR framework identified with sign restrictions to figure out how income inequality related measures react to monetary policy in six different advanced economies. These countries differ by their absolute income inequality as well as their redistribution. We choose the U.S., Canada and South Korea as countries with very little redistribution and Sweden, the Czech Republic and Hungary as countries with relatively high redistribution. While all economies experience an increase in Gini coefficients of gross income in the presence of an expansionary monetary policy shock, only the U.S., Canada and South Korea also show a significant response in Gini coefficient of net income. To figure out how the transmission of monetary policy to income inequality works we pick up the two major channels dominant in the literature: The employment channel and the income composition channel. The latter is analyzed by data from national accounts concerning two different kinds of income households receive: Labor related income and capital payments, both net. While we find that capital owners profit disproportionately in the less redistributing countries, we observe a more even reaction in both income types. This indicates that the harmful effects of expansionary monetary policy on the market income distribution are mitigated if the degree of redistribution is high.