How Does Monetary Policy Affect Income Inequality? Evidence from Europe

Abstract

The issue of inequalities has become increasingly important in recent decades. Although distributional effects, such as inequalities, are commonly associated with globalisation and fiscal policy processes, many of the side effects of the exceptionally loose monetary policy of the last decade also affect the issue. After identifying the mechanisms and channels linking the field of monetary policy and inequality, the research focuses on empirical analyses. The research is based on a panel ARDL test focusing on the 19 Euro area countries and Denmark, Sweden and Switzerland, where negative nominal interest rates have been applied. The research includes the period of 2008–2018. The aim of the paper is to assess how certain monetary policy indicators affect inequality. The main conclusion is consistent with the existing literature: the effect of monetary policy to inequalities is modest, however not negligible. The effect of inflation seems to be weak; however, the rise in unemployment rate and long term interest rates negatively affect inequalities. The positive effects of the rising GDP per capita are also proven by the analysis.