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Moving Closer or Drifting Apart: Distributional Effects of Monetary Policy

Author

Listed:
  • Lucas Hafemann

    () (Justus-Liebig-University Giessen)

  • Paul Rudel

    () (Justus-Liebig-University Giessen)

  • Joerg Schmidt

    () (Justus-Liebig-University Giessen)

Abstract

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.

Suggested Citation

  • Lucas Hafemann & Paul Rudel & Joerg Schmidt, 2017. "Moving Closer or Drifting Apart: Distributional Effects of Monetary Policy," MAGKS Papers on Economics 201721, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201721
    as

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    File URL: https://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2017/21-2017_hafemann.pdf
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    References listed on IDEAS

    as
    1. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    2. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
    3. Inoue, Atsushi & Kilian, Lutz, 2013. "Inference on impulse response functions in structural VAR models," Journal of Econometrics, Elsevier, vol. 177(1), pages 1-13.
    4. Dietrich Domanski & Michela Scatigna & Anna Zabai, 2016. "Wealth inequality and monetary policy," BIS Quarterly Review, Bank for International Settlements, March.
    5. Adrien Auclert, 2015. "Monetary Policy and the Redistribution Channel," 2015 Meeting Papers 381, Society for Economic Dynamics.
    6. Areosa, Waldyr Dutra & Areosa, Marta B.M., 2016. "The inequality channel of monetary transmission," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 214-230.
    7. Karen Davtyan, 2016. "“Income Inequality and Monetary Policy: An Analysis on the Long Run Relation”," AQR Working Papers 201604, University of Barcelona, Regional Quantitative Analysis Group, revised Apr 2016.
    8. Nils Gornemann & Keith Kuester & Makoto Nakajima, 2016. "Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy," International Finance Discussion Papers 1167, Board of Governors of the Federal Reserve System (U.S.).
    9. Karen Davtyan, 2016. "“Income Inequality and Monetary Policy: An analysis on the Long Run Relation”," IREA Working Papers 201604, University of Barcelona, Research Institute of Applied Economics, revised Apr 2016.
    10. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 0091, European Central Bank.
    11. Margaux MacDonald & Michal Popiel, 2016. "Unconventional monetary policy in a small open economy," Working Papers 1367, Queen's University, Department of Economics.
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    14. repec:eee:moneco:v:88:y:2017:i:c:p:70-89 is not listed on IDEAS
    15. Haroon Mumtaz & Angeliki Theophilopoulou, 2015. "Monetary Policy and Inequality in the UK," Working Papers 738, Queen Mary University of London, School of Economics and Finance.
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    Cited by:

    1. Bunn, Philip & Pugh, Alice & Yeates, Chris, 2018. "The distributional impact of monetary policy easing in the UK between 2008 and 2014," Bank of England working papers 720, Bank of England.

    More about this item

    Keywords

    Income Inequality; Factor Income Distribution; Monetary Policy; VAR; Sign-Restrictions;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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