The Unassuming Economist

Do the actions of central banks affect inequality? Leading central bankers have been discussing the issue (e.g., Yellen 2014; Bernanke 2015, Draghi 2016) but there is little consensus about the sign and magnitude of the effect. Our new paper documents how monetary policy affects income inequality in 32 advanced economies and emerging market countries over the period of 1990-2013. We find that decline of 100 basis points in the policy interest rate lowers inequality by about 1¼ percent in the short term and by about 2¼ percent in the medium term. The effect is significant and holds for different measures of inequality (Gini coefficient, top income shares and labor share of income). To identify the causal effect of monetary policy shocks on inequality, we borrow from the recent literature on fiscal policy (Auerbach and Gorodnichenko 2013) and construct unexpected changes in policy rates that are orthogonal to innovations in economic activity.