DP17049 On the Effects of Monetary Policy Shocks on Earnings and Consumption Heterogeneity

Author(s): Minsu Chang, Frank Schorfheide
Publication Date: February 2022
Keyword(s): Consumption Distribution, Earnings distribution, Functional Vector Autoregressions, Heterogeneous Agent Models, monetary policy shocks
JEL(s): C11, C32, C52, E32
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17049

In this paper we use the functional vector autoregression (VAR) framework of Chang, Chen, and Schorfheide (2021) to study the effects of monetary policy shocks (conventional and informational) on the cross-sectional distribution of earnings and consumption. We find that an expansionary monetary policy shock reduces earnings inequality. The reduction is generated by what we call the employment channel. In the left tail of the earnings distribution, the expansion lifts individuals out of unemployment and thereby reduces the earnings dispersion. For consumption we obtain the opposite result: the expansionary policy shock raises the mass in the right tail of the consumption distribution, thereby increasing consumption inequality.