Monetary Policy and Inequality in a Small Open Economy

60 Pages Posted: 21 Jan 2022 Last revised: 11 Nov 2022

See all articles by Petri Mäki-Fränti

Petri Mäki-Fränti

Bank of Finland

Aino Silvo

Bank of Finland

Adam Gulan

Bank of Finland - Research

Juha Kilponen

Bank of Finland - Research

Date Written: January 20, 2022

Abstract

We study the impact of monetary policy on income and wealth distributions in a small open economy. To do so, we use household-level registry and survey data from Finland, a small member of a monetary union. This setup allows us to circumvent endogeneity issues and thus helps achieve causal interpretation. We find that expansionary monetary shocks stimulate economic activity, earnings, and asset prices, while barely affecting income and wealth inequality. The reduction in unemployment mostly benefits households in lower income quintiles, where the initial rate of unemployment is high. Households in upper income quintiles, where the rate of employment is higher, benefit relatively more from higher wages. Higher house prices increase the net wealth of all homeowners. However, due to a leverage effect, households with large mortgages located in the lower net wealth quintiles benefit most. Rising stock prices, in turn, benefit mainly households in the top net wealth quintile. Overall, these different channels have counteracting effects on income and wealth inequality.

Keywords: monetary policy, income inequality, wealth inequality

JEL Classification: D31, E32, E52

Suggested Citation

Mäki-Fränti, Petri and Silvo, Aino and Gulan, Adam and Kilponen, Juha, Monetary Policy and Inequality in a Small Open Economy (January 20, 2022). Bank of Finland Research Discussion Paper No. 3/2022, Available at SSRN: https://ssrn.com/abstract=4014139

Petri Mäki-Fränti

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Aino Silvo (Contact Author)

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Adam Gulan

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Juha Kilponen

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
180
Abstract Views
672
Rank
339,248
PlumX Metrics