DP16079 How Does Monetary Policy Affect Income and Wealth Inequality? Evidence from Quantitative Easing in the Euro Area

Author(s): Michele Lenza, Jirka Slacalek
Publication Date: April 2021
Keyword(s): Household heterogeneity, Income, Inequality, monetary policy, Quantitative easing, wealth
JEL(s): D14, D31, E44, E52, E58
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16079

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.