The impact of monetary policy on income inequality: Does inflation targeting matter?

Abstract

Does inflation targeting affect the nexus between monetary policy and income inequality? We address this question by estimating country-specific structural vector autoregression models across the G7 economies. We find that contractionary monetary policy shocks increase income inequality when using a long period of data from 1974–2019. However, controlling for the adoption of inflation targeting reduces the size of this effect in Japan and the UK, and it disappears altogether in Canada and the US. This suggests that country-specific inflation targeting may mitigate the inequality-inducing effects of unanticipated monetary contractions. In contrast, mixed evidence is found for Eurozone countries: France, Germany, and Italy.