Income Inequality and the Distributional Effects of Monetary Policy: The Role of Financial Heterogeneity

We study the effects of both standard and unconventional monetary policies (UMPs) of the European Central Bank (ECB) on income inequality in 19 Euro Area (EA) member states over the years 2008-2018. We distinguish two main groups of UMPs: quantitative easing (QE) and credit easing (CE) policies. We further investigate the role of financial heterogeneity among EA member states in affecting the distributional effects of these monetary policies. Using the pooled mean group (PMG) estimator we find that restrictive standard monetary policy and expansionary UMPs lead to higher income inequality. Furthermore, our results suggest that a higher level of financial development augments the distributional effects of monetary policies. We also find that the financial integration and the stage of the credit cycle affect the distributional effects of monetary policy, while the stage of real estate prices and stock prices cycles do not.