The impact of monetary policy on low-income households

Abstract

How does monetary policy affect the purchasing power of low-income households? In this study, I address this question by employing a Panel VAR model with an exogenous variable for the Euro Area. Results suggest that contractionary monetary policy significantly reduces the purchasing power of low-income households, with this effect becoming evident after approximately four years. In contrast, expansionary monetary policy appears to have no significant impact on these households. Interestingly, the market Gini coefficient, which measures pre-tax and pre-transfer income inequality, decreases after a contractionary monetary policy shock. This counterintuitive result suggests a reduction in income inequality, possibly due to a larger income decrease in higher-income households. These findings highlight the nuanced impacts of monetary policy on different income groups, emphasizing the importance of considering the specific effects on low-income households beyond general measures of income inequality.