On the Effects of Monetary Policy Shocks on Earnings and Consumption Heterogeneity

Minsu Chang and Frank Schorfheide

No 17049, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this paper we use the functional vector autoregression (VAR) framework of Chang, Chen, and Schorfheide (2021) to study the effects of monetary policy shocks (conventional and informational) on the cross-sectional distribution of earnings and consumption. We find that an expansionary monetary policy shock reduces earnings inequality. The reduction is generated by what we call the employment channel. In the left tail of the earnings distribution, the expansion lifts individuals out of unemployment and thereby reduces the earnings dispersion. For consumption we obtain the opposite result: the expansionary policy shock raises the mass in the right tail of the consumption distribution, thereby increasing consumption inequality.

Keywords: Consumption distribution; Earnings distribution; Functional vector autoregressions; Heterogeneous agent models; Monetary policy shocks (search for similar items in EconPapers)
JEL-codes: C11 C32 C52 E32 (search for similar items in EconPapers)
Date: 2022-02
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