The impact of monetary policy shocks on income inequality: a tale of two countries

Abstract

The easing monetary policy after the global financial crisis triggered wide concerns on the responses of income inequality. In this paper, we investigate impact of monetary policy shocks on income inequality. We propose a general equilibrium model and show that monetary policies could affect income inequality by affecting the earnings of high-income households in financial markets and business operations. Using a TVP-FAVAR model, we find contradictory distributional effects of monetary policy shocks in China and the US. Specifically, expansionary monetary policy shocks persistently increase income inequality in China but decrease income inequality in the US. Moreover, the impacts are volatile in the short-term, but stabilise after 10 periods. The investigation on the responses of top 1% and bottom 50% income share confirms the finding of contradictory distributional effects of monetary policy shocks.