How does monetary policy affect income inequality in Japan? Evidence from grouped data

Abstract

We examine the effects of monetary policy on income inequality in Japan. For that purpose, we use a novel Bayesian approach that jointly estimates the Gini coefficient from grouped income data and the dynamics of macroeconomic quantities. Our results indicate different effects on income inequality for different types of households: A monetary tightening decreases inequality when we consider a broad definition of household data that also includes the unemployed and retirees. Higher unemployment and tighter borrowing conditions make the richer (i.e., employed) comparably worse off. The result reverses, if we focus on the subsample of households whose head is employed. Through the same channels, inequality increases if monetary policy is tightened. A counterfactual analysis reveals that indeed the financial channel and the job destruction channel are the most important transmission mechanisms.