Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 416: The Curious Incidence of Monetary Policy Across the Income Distribution

Tobias Broer (), John Kramer () and Kurt Mitman ()
Additional contact information
Tobias Broer: Paris School of Economics, IIES, Stockholm University, and CEPR
John Kramer: IIES, Stockholm University
Kurt Mitman: IIES, Stockholm University, CEPR and IZA

Abstract: We use high-frequency administrative data from Germany to study the effects of monetary policy on income and employment across the earnings distribution. Earnings growth at the bottom of the distribution is substantially more elastic to policy shocks. This unequal incidence is driven by differences in the response of employment risk across the distribution: job loss is more countercyclical for lower-earnings households. Viewed through the lens of a standard incomplete-markets model, the heterogeneous incidence substantially amplifies the equilibrium response of aggregate consumption to shocks.

Keywords: Inequality; Monetary Policy; Heterogeneous agents

JEL-codes: D31; E52; J64

Language: English

42 pages, August 1, 2022

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