Monetary policy and income inequality in Korea

Abstract

This paper analyzes the relationships between monetary policy and income inequality in Korea. We calculate Gini coefficient for various income range using data from the Household Income and Expenditure Survey and then estimate a block-exogeneity VAR representing Korean and US economies to examine the effects of monetary policies on income inequality. The results show that following a one-standard deviation contractionary (expansionary) monetary policy shock, market income Gini coefficient increases (decreases) significantly after one year, reaching its peak to 0.0014 (0.14%p) while GDP and CPI decrease (increase) significantly by 0.48% and 0.15%, respectively. The contributions of monetary policy shocks to income inequality are found to be small as shown by forecast error variance and historical decompositions. In addition, earnings heterogeneity channel is most important among various channels through which monetary policy affects income inequality. Finally, a counterfactual analysis implies that if Bank of Korea held the call rate constant at 5.13% from 2008:Q3 and thereafter, the average of market income Gini coefficient would be higher by 0.009 (0.9%p) during 2008:Q4–2015:Q1 under the assumption of static expectations.