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How does monetary policy affect income and wealth inequality? Evidence from quantitative easing in the euro area

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  • Michele Lenza
  • Jiri Slacalek

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 quantitative easing (QE) shock, identified by means of external instruments, in a multi‐country vector autoregression (VAR) model with unemployment, wages, gross operating surplus, 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 because 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.

Suggested Citation

  • Michele Lenza & Jiri Slacalek, 2024. "How does monetary policy affect income and wealth inequality? Evidence from quantitative easing in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(5), pages 746-765, August.
    • Handle: RePEc:wly:japmet:v:39:y:2024:i:5:p:746-765
    DOI: 10.1002/jae.3053
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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