The Redistributive Effects of Monetary Policy: Evidence from a Century of Modern Economic History
36 Pages Posted: 30 Jan 2019
Date Written: January 15, 2019
This paper examines the distributional implications of monetary policy from a long-run perspective, with data spanning 100 years of modern economic history in 12 advanced economies. We employ a two-step approach, by estimating a Panel VAR and a single-equation model with local projections, to obtain the dynamic responses of the top 1% income share to a monetary policy shock. We exploit the implications of the macroeconomic policy trilemma, in order to identify exogenous variations in monetary conditions. This offers a genuine orthogonal perspective to capture fluctuations in short term interest rates unrelated to home economic conditions. The obtained results indicate that expansionary monetary policy strongly increases income inequality and vice-versa. These results have important implications for monetary policy coordination and the design of economic policies that aim to reduce income inequality.
Keywords: Monetary policy, Income inequality, Local projections, Panel VAR
JEL Classification: E62, E64, D63
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