Monetary policy and inequality: a heterogeneous agents' approach

This paper examines the influence of contractionary monetary policies (MPs) on income and wealth inequality. By developing an Agent-Based Stock-Flow Consistent model, we show that both the sign and magnitude of monetary policy effects are determined by heterogeneity in income sources and portfolio preferences. We model four transmission channels of the MPs, and their interaction: the cost push (CP), the aggregate demand (AD), the saving remuneration (SR) and the asset price (PA) channels. We show that the long-term effects of MPs are nonlinear and depend on key structural factors, including the degree of symmetry in the distribution of non-financial firms and bank shares, the labour share, unemployment subsidies, the saving rate, the aggregate share of wealth allocated to financial assets, and portfolio heterogeneity. In particular, the AD, SR, and CP channels play a dominant role in shaping long-run outcomes. The short-run effects are driven by the capital gains and losses (CGLs) on stocks and long-term bonds, alongside the financial channel. Overall, our results suggest that the potential for an equalising effect of MPs is largely confined to the short term, stemming from portfolio composition heterogeneity. In the long-run, this possibility diminishes. It becomes contingent on a more equitable distribution of bank shares relative to non-financial firms’ shares and on structural factors such as a low labour share, portfolio heterogeneity, and/or a combination of a high saving rate and generous unemployment subsidies.