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The impact of monetary policy on functional income distribution: a panel VAR analysis (1970-2019)

Author

Listed:
  • Di Bucchianico, Stefano

    (CELPE - CEnter for Labor and Political Economics, University of Salerno, Italy)

  • Lofaro, Antonino

    (University of Siena (Department of Economics and Statistics))

Abstract

The connection between monetary policy and income distribution and inequality is experiencing remarkable interest. However, first, there is no consensus in the empirical literature on the impact of monetary policy shocks on income distribution and inequality. Second, the literature mainly focuses on monetary policy's effects on personal rather than functional income distribution. Third, the working hypothesis is for monetary policy to have at most an impact over the cycle but not in the long run. Therefore, our work grounds on three pillars. First, we tackle the role of monetary policy in shaping functional income distribution by looking at the level of real wages and the size of the labor share of income. Second, we employ a panel VAR methodology to a panel dataset of 15 advanced economies during the 1970-2019 period. Third, we pose special attention to the ‘labor market’ channel of monetary policy. According to our results, a contractionary monetary policy shock generates long-run adverse effects on the level of real wages and labor share. This result is mainly attributed to the scarring impact of contractionary monetary on various labor market indicators, an effect that persists even when the ‘cost’ and ‘activity’ channels make GDP and the price level fall back to their pre-shock values.

Suggested Citation

  • Di Bucchianico, Stefano & Lofaro, Antonino, 2024. "The impact of monetary policy on functional income distribution: a panel VAR analysis (1970-2019)," CELPE Discussion Papers 168, CELPE - CEnter for Labor and Political Economics, University of Salerno, Italy.
    • Handle: RePEc:sal:celpdp:0168
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    More about this item

    Keywords

    Monetary policy; functional income distribution; Panel VAR; labor share; labor market;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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