Impact of monetary policy on functional income distribution: A panel vector autoregressive analysis

Antonino Lofaro and Stefano Di Bucchianico

Economic Modelling, 2025, vol. 151, issue C

Abstract: This study examines the impact of monetary policy on functional income distribution, which is defined here as the level of real wages and the size of the labor share of income. This topic has often been overshadowed by analyses of personal income inequality. Although prior research has presented mixed evidence while focusing on short-term effects, we investigate the medium-to long-term distributional consequences of monetary tightening. Using a panel vector autoregressive framework and a dataset encompassing 15 advanced economies from 1970 to 2019, we analyze how real wages and the labor share respond to contractionary monetary policy. Our findings reveal that contractionary monetary policies lead to persistent declines in both real wages and the labor share. By disentangling the underlying transmission mechanisms, we identify the labor market channel as the primary driver: the scarring effects on wages and labor force participation endure even after output and prices stabilize. These results underscore the importance of incorporating long-term distributional considerations into the formulation of monetary policy.

Keywords: Monetary policy; Functional income distribution; Panel vector autoregression; Labor share; Labor market (search for similar items in EconPapers)
JEL-codes: E24 E52 E58 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999325002226
Full text for ScienceDirect subscribers only

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:eee:ecmode:v:151:y:2025:i:c:s0264999325002226

DOI: 10.1016/j.econmod.2025.107227

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().