Does the Income Inequality Channel Impact the Transmission of Monetary Policy Shocks to Economic Activity?
Evidence from counterfactual analysis reveals that the income inequality channel accentuates the decline in real economic activity following contractionary monetary policy shocks. In addition, income inequality dampens the increases in marginal propensity to consume, employment growth, GDP growth and disposable income growth due to the expansionary monetary policy shocks. From a policy perspective, Monnin (2017) argues that income inequality matters in understanding and gauging the reaction of the economy to monetary policy impulses. Hence policymakers should take this dimension into account when designing and calibrating policies. This should happen despite income inequality not being depicted in the standard monetary policy transmission mechanism.
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