The European Central Bank has published a research working paper that examines how income inequality affects the international transmission of US monetary policy, while noting that the views are those of the authors and not necessarily those of the ECB. Using data for 87 countries over 1966 to 2020, the paper finds that foreign GDP falls more after a US monetary tightening when income inequality is higher, with output contracting by up to one and a half times more when inequality is above average. The paper finds that this relationship differs by country group. In advanced economies, higher inequality amplifies the negative spillovers from US tightening, while in emerging market economies it mitigates them. A three-country open economy Two-Agent New Keynesian model is used to explain the divergence, pointing to differences in households' access to international financial markets. Where access is broad, higher inequality leads more households to shift portfolios into higher-yielding US assets after a shock, increasing capital outflows and tightening domestic financial conditions. Where access is limited, that reallocation channel is weaker, reducing the adverse GDP effect. The authors report that the data also support an interaction between inequality and financial openness, and show similar cross-country patterns for consumption responses.
European Central Bank 2026-05-04
European Central Bank publishes working paper finding income inequality shapes foreign GDP spillovers from US monetary tightening
The European Central Bank has published a working paper on how income inequality shapes the international transmission of US monetary policy, using data for 87 countries from 1966 to 2020. It finds that foreign GDP falls more after US monetary tightening when inequality is higher, with output contracting up to one and a half times more when inequality is above average. Inequality amplifies spillovers in advanced economies but mitigates them in emerging markets. Using a three-country open economy Two-Agent New Keynesian model, the authors attribute this divergence to differences in households’ access to international financial markets and find similar cross-country patterns for consumption.