Monetary policy and earnings inequality.Inflation dependencies

Jaanika Merikyll () and Matthias Rottner

No wp2025-05, Bank of Estonia Working Papers from Bank of Estonia

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: 2025-06-13, Revised 2025-06-13
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.bankofestonia.info/pub/en/dokumendid/pu ... 25-05/wp_2025_05.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eea:boewps:wp2025-05

Ordering information: This working paper can be ordered from
Estonia bld. 13, 15095 Tallinn, ESTONIA

Access Statistics for this paper

More papers in Bank of Estonia Working Papers from Bank of Estonia Estonia bld. 13, 15095 Tallinn, ESTONIA. Contact information at EDIRC.
Bibliographic data for series maintained by Peeter Luikmel ().