Monetary policy and inequality: Financial channels

This paper analyses the effects of monetary policy on inequality over the business cycle via its impacts on returns on assets, the cost of debt servicing, and asset prices in selected advanced economies. Monetary policy easing has a priori ambiguous effects on income and net wealth inequality via financial channels. Effects depend in a complex way on the relative size and distributions of assets, liabilities, and income. In practice, these effects are estimated to be small. A house price increase generally reduces net wealth inequality, while the opposite is true for increases in stock and bond prices. As monetary policy has the potential to affect inequality, monetary authorities face communication challenges. The available research on interactions between monetary policy and inequality does not justify targeting inequality by central banks.