This paper studies the distributional effects of monetary policy and its dependence on inflation. We document a novel dependency in the earnings heterogeneity channel of monetary policy using high-frequency, administrative tax data from eurozone member Estonia. Monetary policy shocks substantially influence earnings inequality during high-inflation periods, with weaker effects during low-inflation periods. Extending our dataset with granular MPC estimates, we show that earnings heterogeneity amplifies the aggregate MPC and consumption response. In high-inflation periods, consumption and inequality respond more, even though the aggregate MPC may be lower. We rationalise our findings with a nonlinear tractable HANK model featuring inflation dependencies.
Keywords: Monetary policy, labour income inequality, inflation, state dependency, earnings heterogeneity channel, aggregate MPC
JEL classification: E52, D31, J31, J63
The views in this paper are solely those of the authors and should not be interpreted as reflecting the views of Eesti Pank, the Bank for International Settlements, the Deutsche Bundesbank, or the Eurosystem.
