The Unassuming Economist

From a paper by Domenico D’Ausilio & Massimiliano Cerciello:

“This paper investigates the relationship between monetary policy and income inequality across 32 OECD countries over the period 1995 to 2023. We estimate a dynamic panel model using the system Generalised Method of Moments estimator, accounting for persistence in inequality, unobserved country heterogeneity, and potential endogeneity between monetary policy and distributional outcomes. To capture non-linear transmission, the short-term nominal interest rate enters the model in both linear and quadratic form. Income inequality is measured through the Gini index and the income shares held by the top 10%, middle 40%, and bottom 50%, distinguishing between gross and net income to account for fiscal redistribution. The results show that monetary policy tightening and sufficiently large monetary easing are both associated with lower inequality, mainly through a decline in the top income share and an increase in the bottom 50% share. Smaller rate cuts, by contrast, are associated with higher inequality. These patterns suggest that the distributional effects of monetary policy vary with the intensity of the policy stance and the segment of the income distribution considered, while fiscal redistribution attenuates but does not eliminate the underlying non-linear relationship.”