The paper is superbly titled as Innocent Bystanders? Monetary Policy and Inequality in the U.S.. It is by four econs - Olivier Coibion, Yuriy Gorodnichenko, Lorenz Kueng, John Silvia.
We should now add impact of monetary transmission on inequality as well..
The paper looks at the role of mon pol in the rising inequality crisis in US:
We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.
What is interesting is to figure the channels via which mon pol has an impact on inequality.
Three channels lead to rising inequality:
The first is the income composition channel, i.e. the fact that there is heterogeneity across households in terms of their primary sources of income. While most households rely primarily on labor earnings, others receive larger shares of the income from business and financial income. If expansionary monetary policy shocks raise profits more than wages, then those with claims to ownership of firms will tend to benefit disproportionately. Since the latter also tend to be wealthier (a fact we verify in our data), this channel should lead to higher inequality in response to monetary policy shocks.
The second is the financial segmentation channel: if some agents frequently trade in financial markets and are affected by changes in the money supply prior to other agents, then an increase in the money supply will redistribute wealth toward those agents most connected to financial markets, as in Williamson (2009) and Ledoit (2009). To the extent that agents who participate actively in financial trades have higher income and consumption on average than unconnected agents, then this channel also implies that consumption inequality should rise after expansionary monetary policy shocks.
An additional channel pushing in the same direction is the portfolio channel. If low-income households tend to hold relatively more currency than high-income households as in Erosa and Ventura (2002) or Albanesi (2007), then inflationary actions on the part of the central bank would represent a transfer from low-income households toward high-income households which would tend to increase consumption inequality.
Two channels lead to opposite results:
Two other channels, however, will tend to move inequality in the opposite direction in response to expansionary monetary policy actions. The first is the savings redistribution channel: an unexpected increase in interest rates or decrease in inflation will benefit savers and hurt borrowers as in Doepke and Schneider (2006), thereby generating an increase in consumption inequality (to the extent that savers are generally wealthier than borrowers).
The second is the earnings heterogeneity channel. Labor earnings are the primary source of income for most households and these earnings may respond differently for high-income and low-income households to monetary policy shocks.
So pretty much a mixed bag. Which channels are more powerful?
Using these measures of inequality, we document that monetary policy shocks have statistically significant effects on inequality: a contractionary monetary policy shock raises the observed inequality across households in income, labor earnings, expenditures and consumption. These results are robust to the time sample, such as dropping the Volcker disinflation period or all recession quarters, and are not qualitatively different when we employ alternative approaches to estimate impulse responses, such as VAR’s, or also control for other macroeconomic shocks. They are also largely invariant to controlling for household size and other observable household characteristics such as age, education, or hours worked.
In addition, monetary policy shocks appear to have played a non-trivial role in accounting for cyclical fluctuations in inequality over this time period. For example, forecast error variance decompositions suggest that the contribution of monetary policy shocks to inequality is of the same order of magnitude as the contribution of monetary policy shocks to other macroeconomic variables like GDP and inflation. Furthermore, monetary policy shocks can account for a surprising amount of the historical cyclical changes in income and consumption inequality, particularly since the mid-1990s.
It has some other findings as well.
Something on zero bound rates:
Finally, the sensitivity of inequality measures to monetary policy actions points to even larger costs of the zero-bound on interest rates than is commonly identified in representative agent models. Nominal interest rates hitting the zero-bound in times when the central bank’s systematic response to economic conditions calls for negative rates is conceptually similar to the economy being subject to a prolonged period of contractionary monetary policy shocks. Given that such shocks appear to increase income and consumption inequality, our results suggest that standard representative agent models may significantly understate the welfare costs of zero-bound episodes.