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Title: How Does Monetary Policy Affect Income and Wealth Inequality? Evidence from Quantitative Easing in the Euro Area

Author(s): Michele Lenza and Jirka Slacalek

Publication Date: April 2021

Keyword(s): Household heterogeneity, Income, Inequality, monetary policy, Quantitative easing and wealth

Programme Area(s): Monetary Economics and Fluctuations

Abstract: This paper evaluates the impact of quantitative easing on income and wealth of individual euro area households. We first estimate the aggregate effects of a QE shock, identified by means of external instruments, in a multi-country VAR model with unemployment, wages, interest rates, house prices and stock prices. We then distribute the aggregate effects across households using a reduced-form simulation on micro data, which captures the portfolio composition, the income composition and the earnings heterogeneity channels of transmission. The earnings heterogeneity channel is important: QE compresses the income distribution since many households with lower incomes become employed. In contrast, monetary policy has only negligible effects on the Gini coefficient for wealth: while high-wealth households benefit from higher stock prices, middle-wealth households benefit from higher house prices.

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Bibliographic Reference

Lenza, M and Slacalek, J. 2021. 'How Does Monetary Policy Affect Income and Wealth Inequality? Evidence from Quantitative Easing in the Euro Area'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16079