Who takes the cake? The heterogeneous effect of ECB accommodative monetary policy across income classes

Working Paper 2023-657


This work provides evidence on the heterogeneous effects of ECB’s monetary policy across income classes in the euro area. In particular, this investigation focuses on the macroeconomic channel and analyses how expansionary monetary policy affects income inequality through the labour market, that is, by stimulating economic activity which ultimately affects income classes differently. Based on European Union Statistics on Income and Living Conditions (EU-SILC) data, we compute specific labour market metrics for each income class (lower, lower-middle, upper-middle, and upper) for the countries that originated the Economic and Monetary Union (EMU-11). Covering the period between 2006Q1 and 2019Q4, we estimate a series of country-specific structural Vector Autoregressive (SVAR) models to analyse the impact of an unexpected decline in the euro area shadow rate. As a robustness check, we estimate local projections models using exogenous monetary policy surprises. The results suggest that past monetary easing shocks helped decrease unemployment rates for lower- and middle-income class households, to a larger extent for the former. This differential impact across income classes is accounted for a substantially stronger improvement in job finding rates for those located at the bottom of the income distribution. In contrast, job separation rates have been homogeneously affected across the distribution. Conversely, the employment status of those located at the rightmost side of the income distribution seems to have been less elastic to monetary policy shocks. The analysis identifies a positive impact of expansionary monetary policy on real labour income. Overall, our results suggest that expansionary monetary policy has helped decrease labour income inequality.

Authors: Natalia Martín Fuentes, Elena Bárcena Martín, Salvador Pérez Moreno.

Keywords: Monetary policy, income inequality, income class, structural vector autoregressions (SVARs), local projections, euro area.
JEL: C11, D31, E52