Monetary policy and Inequality: Model Assessment and Literature Review

Monetary policy is a broad stabilisation tool aimed at maintaining price stability and supporting stable macroeconomic conditions. By influencing interest rates, asset prices, employment, income and borrowing costs, monetary policy also affects the economic position of households across the euro area. Since households differ in the income they earn, the assets they hold and the debts they owe, these effects are unlikely to be distributed evenly. Monetary policy may therefore have implications for income and wealth inequality.

This study examines the distributional effects of monetary policy in the euro area. It combines insights from the academic literature with evidence from a two-asset Heterogeneous Agent New Keynesian model calibrated to euro area data. The framework allows for heterogeneity in household income and wealth and is used to analyse how different monetary policy transmission channels affect households in the short to medium term.