Effects of monetary policy shocks on income mobility in the Euro area countries

Elena Bárcena-Martín,Salvador Pérez-Moreno,Natalia Martín-Fuentes

doi:10.2298/pan1903307b

Abstract

This paper examines the impacts of monetary policy shocks on income mobility in the Euro area, relying on earnings heterogeneity and income composition channels through which monetary policy affects income distribution. From a relative mobility perspective, upward and downward mobility are estimated over the period 2004-2014 for the EMU countries that originated the Economic and Monetary Union (EMU 1999). By using a vector error correction model (VECM) approach, overall we find that an expansionary monetary policy seems to encourage upward mobility and discourage downward mobility. By income groups, a loose monetary policy appears to reduce downward mobility for the upper class, while no empirical evidence can be provided to support that monetary policy shocks alter upward mobility for the lower class. Monetary policy shocks are especially favourable for the middle class as an expansionary monetary policy seems to boost upward mobility. A detailed analysis of the middle class shows that an expansionary monetary policy may propel the upward mobility and hinder the downward mobility of the lower-middle class, particularly favouring this income group.

Highlights

The global financial crisis of 2007-2008 and the subsequent period of financial and economic instability resulting from the massive contagion process entailed an unprecedented challenge for the European Central Bank (ECB)
As our interest is on income mobility, we focus on the impulse-response functions associated with upward and downward mobility to test the impact of a monetary policy shock on income mobility
The transmission mechanisms are characterised by variable and uncertain time lags and it is difficult to predict the precise effect of monetary policy actions, our results suggest that, on average, a negative standard deviation shock in long-term real interest rates leads to a reduction in the upward mobility of 0.1 points after one year16

Summary

Introduction

The global financial crisis of 2007-2008 and the subsequent period of financial and economic instability resulting from the massive contagion process entailed an unprecedented challenge for the European Central Bank (ECB). The ECB, altogether with other central banks, adapted its usual monetary policy framework to ensure the provision of liquidity to the banking sector and to try to revive credit in the euro area. For this purpose, they broadened their assortment of monetary instruments and implemented ultra-loose monetary policies to avoid a complete meltdown of the financial sector and to limit the adverse impact on the real economy

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