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Monetary policy and inequality in a small open economy

Petri Mäki-Fränti, Aino Silvo, Adam Gulan () and Juha Kilponen

No 3/2022, Research Discussion Papers from Bank of Finland

Abstract: We study the impact of monetary policy on income and wealth distributions in a small open economy. To do so, we use household-level registry and survey data from Finland, a small member of a monetary union. This setup allows us to circumvent endogeneity issues and thus helps achieve causal interpretation. We find that expansionary monetary shocks stimulate economic activity, earnings, and asset prices, while barely affecting income and wealth inequality. The reduction in unemployment mostly benefits households in lower income quintiles, where the initial rate of unemployment is high. Households in upper income quintiles, where the rate of employment is higher, benefit relatively more from higher wages. Higher house prices increase the net wealth of all homeowners. However, due to a leverage effect, households with large mortgages located in the lower net wealth quintiles benefit most. Rising stock prices, in turn, benefit mainly households in the top net wealth quintile. Overall, these different channels have counteracting effects on income and wealth inequality.

JEL-codes: D31 E32 E52 (search for similar items in EconPapers)
Date: 2022-01-20
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Published in A revised version published on 28 June 2022 replaces the BoF DP 3/2022 of the name "Monetary policy and inequality: the Finnish case”.

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Persistent link: https://EconPapers.repec.org/RePEc:bof:bofrdp:2022_003

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