The Bank for International Settlements released a working paper examining how monetary policy shocks affect labour earnings inequality depending on the inflation environment. Using monthly administrative tax data for Estonia and high-frequency European Central Bank monetary policy surprises, the paper finds that monetary policy shocks have a substantially larger impact on earnings inequality when inflation is high, with much weaker effects in low-inflation periods. The analysis documents heterogeneous responses across the earnings distribution, with low-income workers more strongly affected than higher-income workers and much of the lower-tail impact operating through employment entries and exits rather than wage changes. A high-inflation regime is defined as inflation above 7% (with results also reported as robust to a 5% threshold). Combining the estimated earnings responses with household-level marginal propensity to consume (MPC) measures from Estonia’s Household Finance and Consumption Survey (2021), the authors estimate that the “earnings heterogeneity channel” accounts for about 5% of the aggregate consumption response to a monetary policy shock, raising the aggregate MPC from 0.328 to 0.347; a one-standard-deviation contractionary shock is estimated to reduce consumption by 0.52% and increase the labour-income Gini coefficient by 0.35%. Regime results in the paper show a higher aggregate MPC in low inflation (0.367) than in high inflation (0.345), while the overall consumption and inequality effects of a monetary policy shock are much larger when inflation is high (consumption response -0.83% versus -0.11%, and Gini response 0.42% versus 0.15%).
Bank for International Settlements 2025-06-03
Bank for International Settlements publishes research on inflation-dependent effects of monetary policy on earnings inequality
The Bank for International Settlements released a working paper analyzing monetary policy shocks on labor earnings inequality, highlighting a larger effect during high-inflation periods. Using Estonian tax data and European Central Bank policy surprises, the study shows low-income workers are more affected, with significant impacts on employment rather than wages. The "earnings heterogeneity channel" contributes to 5% of the aggregate consumption response, with notable differences in consumption and inequality effects between high and low inflation regimes.