Monetary policy and earnings inequality: inflation dependencies

Jaanika Meriküll and Matthias Rottner

No 1271, BIS Working Papers from Bank for International Settlements

Abstract: This paper studies the distributional effects of monetary policy and its dependence on inflation. We document a novel dependency in the earnings heterogeneity channel of monetary policy using high-frequency, administrative tax data from eurozone member Estonia. Monetary policy shocks substantially influence earnings inequality during high-inflation periods, with weaker effects during low-inflation periods. Extending our dataset with granular MPC estimates, we show that earnings heterogeneity amplifies the aggregate MPC and consumption response. In high-inflation periods, consumption and inequality respond more, even though the aggregate MPC may be lower. We rationalise our findings with a nonlinear tractable HANK model featuring inflation dependencies.

Keywords: monetary policy; labour income inequality; inflation; state dependency; earnings heterogeneity channel; aggregate MPC (search for similar items in EconPapers)
JEL-codes: D31 E52 J31 J63 (search for similar items in EconPapers)
Date: 2025-06
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1271

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