The impact of monetary policy on functional income distribution: a panel VAR analysis (1970-2019)

Stefano Di Bucchianico and Antonino Lofaro
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Antonino Lofaro: University of Siena (Department of Economics and Statistics)

No 168, CELPE Discussion Papers from CELPE - CEnter for Labor and Political Economics, University of Salerno, Italy

Abstract: The connection between monetary policy and income distribution and inequality is experiencing remarkable interest. However, first, there is no consensus in the empirical literature on the impact of monetary policy shocks on income distribution and inequality. Second, the literature mainly focuses on monetary policy's effects on personal rather than functional income distribution. Third, the working hypothesis is for monetary policy to have at most an impact over the cycle but not in the long run. Therefore, our work grounds on three pillars. First, we tackle the role of monetary policy in shaping functional income distribution by looking at the level of real wages and the size of the labor share of income. Second, we employ a panel VAR methodology to a panel dataset of 15 advanced economies during the 1970-2019 period. Third, we pose special attention to the ‘labor market’ channel of monetary policy. According to our results, a contractionary monetary policy shock generates long-run adverse effects on the level of real wages and labor share. This result is mainly attributed to the scarring impact of contractionary monetary on various labor market indicators, an effect that persists even when the ‘cost’ and ‘activity’ channels make GDP and the price level fall back to their pre-shock values.

Keywords: Monetary policy; functional income distribution; Panel VAR; labor share; labor market (search for similar items in EconPapers)
JEL-codes: E24 E52 E58 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2024-10-03
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Related works:
Working Paper: The impact of monetary policy on functional income distribution: a panel SVAR analysis (1970-2019) (2023)
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