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Income inequality as long-term conditioning factor of monetary transmission to bank rates

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  • Domonkos, Tomas
  • Fisera, Boris
  • Siranova, Maria

Abstract

Empirical evidence on the effect of income inequality on monetary policy transmission to bank interest rates remains scarce, despite few theoretical and empirical contributions suggesting that inequality might influence the response of economic agents to monetary policy shocks. We develop a novel measure of income inequality to investigate the effect of inequality on the transmission of monetary policy to bank loan rates. Using a panel of euro area countries over the years 2008–2016, we find that income inequality influences the transmission of monetary policy to bank loan rates over the long-term. The effect of income inequality on monetary transmission is heterogeneous across the different loan market segments and monetary policy measures. More specifically, higher income inequality hinders the transmission of standard monetary policy to consumer loan rates and limits the transmission of unconventional monetary policy to housing loan rates. Conversely, higher inequality improves monetary transmission to small firm loan segment.

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  • Domonkos, Tomas & Fisera, Boris & Siranova, Maria, 2023. "Income inequality as long-term conditioning factor of monetary transmission to bank rates," Economic Modelling, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003048
    DOI: 10.1016/j.econmod.2023.106492
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    Cited by:

    1. Hayo, Bernd, 2023. "Does the ECB's monetary policy affect personal finances and economic inequality? A household perspective from Germany," Economic Modelling, Elsevier, vol. 129(C).

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    More about this item

    Keywords

    Monetary policy transmission; Interest-rate pass-through; Interacted PMG estimator; Income inequality; Standard monetary policy; Unconventional monetary policy;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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