How Does Monetary Policy Affect Income and Wealth Inequality? Evidence from Quantitative Easing in the Euro Area

50 Pages Posted: 31 Oct 2018

See all articles by Michele Lenza

Michele Lenza

European Central Bank (ECB)

Jiri Slacalek

European Central Bank (ECB)

Date Written: October 30, 2018

Abstract

This paper studies the effects of quantitative easing on income and wealth of individual euro area households. The aggregate effects of quantitative easing are estimated in a multi-country VAR model of the four largest euro area countries, in which key variables affecting household income and wealth are included, such as the unemployment rate, wages, interest rates, house prices and stock prices. The aggregate effects are distributed across the individual households by means of a reduced-form simulation on micro data from the Household Finance and Consumption Survey, capturing the income composition, the portfolio composition and the earnings heterogeneity channels of transmission. We find that the earnings heterogeneity channel plays a key role: quantitative easing compresses the income distribution since many households with lower incomes become employed. In contrast, monetary policy has only negligible effects on wealth inequality.

Keywords: monetary policy, household heterogeneity, inequality, income, wealth, quantitative easing, Great Recession

JEL Classification: D14, D31, E44, E52, E58

Suggested Citation

Lenza, Michele and Slacalek, Jiri, How Does Monetary Policy Affect Income and Wealth Inequality? Evidence from Quantitative Easing in the Euro Area (October 30, 2018). ECB Working Paper No. 2190. Available at SSRN: https://ssrn.com/abstract=3275976

Michele Lenza

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jiri Slacalek (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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