Monetary policy and inequality: Financial channels

• Author: Lukasz Rawdanowicz,Rory O'Farrell
• DOI: http://doi.org/10.1111/infi.12108
• Published date: 01 June 2017
• Date: 01 June 2017

DOI: 10.1111/infi.12108

ARTICLE

Monetary policy and inequality: Financial channels

Rory O’Farrell

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Lukasz Rawdanowicz

OECD, Paris, France

Correspondence

Rory O’Farrell, OECD, 2 rue André

Pascal, Paris 75775, France.

Email: rory.ofarrell@oecd.org

Abstract

This paper analyses the effects of monetary policy on

inequality over the business cycle via its impacts on returns

on assets, the cost of debt servicing, and asset prices in

selected advanced economies. Monetary policy easing has a

priori ambiguous effects on income and net wealth

inequality via financial channels. Effects depend in a

complex way on the relative size and distributions of assets,

liabilities, and income. In practice, these effects are

estimated to be small. A house price increase generally

reduces net wealth inequality, while the opposite is true for

increases in stock and bond prices. As monetary policy has

the potential to affect inequality, monetary authorities face

communication challenges. The available research on

interactions between monetary policy and inequality does

not justify targeting inequality by central banks.

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INTRODUCTION

The highly accommodative stance of monetary policy in advanced countries over recent years has

brought the link between monetary policy and inequality into the spotlight. In particular, quantitative

easing has been perceived to increase inequality given its apparent strong effects on asset prices, and

very low interest rates have attracted criticism from savers. This has led central bankers to pay attention

to inequality (Bullard, 2014; Coeuré, 2012; Panetta, 2015; Yellen, 2014). Indeed, monetary policy has

the potential to affect income and wealth inequality, at least temporarily.

Against this background, this paper analyses the impact of monetary policy on inequality in the

light of the growing empirical and theoretical literature. The main focus is on financial channels via

changes in returns on assets, debt interest payments, and asset prices, rather than via its impact on

employment and inflation. The remainder of the paper is organized as follows. Section 2 summarizes

the main drivers of growing inequality and selected papers on the broader effects of monetary policy on

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© 2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/infi International Finance. 2017;20:174–188.