The Effects of Monetary Policy Shocks on Inequality

IMF Working Papers, December 22, 2016

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Bibliographic details

• Authors: Davide Furceri, Prakash Loungani, Aleksandra Zdzienicka
• Published: December 22, 2016
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475563092.001

Summary

• Study period: 1990-2013.
• Sample: panel of 32 advanced and emerging market countries.
• Core finding: contractionary (expansionary) monetary actions increase (reduce) income inequality.
• Effect heterogeneity: varies over time by shock type (tightening versus expansionary), by state of the business cycle, and across countries by labor income share and redistribution policies.
• Additional result: while an unexpected increase in policy rates increases inequality, changes in policy rates driven by an increase in growth are associated with lower inequality.

Methodology and Scope

• Measure used: unanticipated changes in policy rates.
• Coverage: 32 countries, 1990-2013.
• Publication type: IMF Working Paper.
• Pages: 43.
• Series: Working Paper No. 2016/245.
• Issue: 245.
• Volume: 2016.
• DOI: https://doi.org/10.5089/9781475563092.001
• ISBN: 9781475563092
• ISSN: 1018-5941

Key Findings

• Directional effect:
  • Contractionary monetary policy shocks increase income inequality.
  • Expansionary monetary policy shocks reduce income inequality.
• Asymmetry and state dependence:
  • Effect is larger for positive monetary policy shocks.
  • Effect is especially pronounced during expansions.
• Cross-country heterogeneity:
  • Larger effects in countries with higher labor share of income.
  • Smaller effects in countries with larger redistribution policies.
• Source of policy-rate changes:
  • Unexpected increases in policy rates increase inequality.
  • Policy-rate increases driven by increases in growth are associated with lower inequality.

Subjects and Keywords

• Subject: Central bank policy rate, Financial services, Income distribution, Income inequality, Monetary expansion, Monetary policy, National accounts, Personal income
• Keywords: accommodative monetary policy stance, Central bank policy rate, Global, Income distribution, income inequality, Monetary expansion, monetary policy, monetary policy easing, monetary policy foresight, monetary policy rate, monetary policy shock, monetary policy shocks, panel E, Personal income, WP

Policy Implications and Considerations

• Monetary policy transmission to income distribution is non-neutral and depends on:
  • Whether shocks are anticipated or unanticipated.
  • The state of the business cycle (expansion versus other phases).
  • Structural country characteristics: labor share of income and extent of redistribution policies.
• Design and communication of monetary policy should account for distributional consequences, particularly:
  • The larger inequality impact of positive (tightening) shocks.
  • Mitigating distributional effects in countries with high labor income shares or limited redistribution by coordinating monetary and fiscal/redistributive policies.

IMF Working Paper — "The Effects of Monetary Policy Shocks on Inequality" by Davide Furceri, Prakash Loungani, Aleksandra Zdzienicka (December 22, 2016), Working Paper No. 2016/245, pages 43, DOI: https://doi.org/10.5089/9781475563092.001

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