Distributional Effects of Monetary Policy in the Short Run—Evidence From Norway

We investigate the short-run distributional effects of both non-systematic and systematic monetary policy on income and wealth inequality using a rich administrative household dataset covering more than two million households in Norway from 1993 to 2015. To this end, we first employ a medium-scale New Keynesian DSGE model of a small open economy estimated based on Norwegian data to obtain the aggregate effects of non-systematic and systematic monetary policy on key macro-financial variables relevant for quantifying the channels through which monetary policy affects the distribution of income and wealth. We then use household-level microdata to simulate the heterogeneous impact of monetary policy by income and wealth percentiles as well as demographic variables. Our results show that an expansionary monetary policy shock disproportionately benefits the young and households with medium to low income and wealth. These households tend to be highly leveraged homeowners who benefit disproportionately from higher house prices, lower interest costs on debt and a stronger labour market. We find that expansionary monetary policy reduces both income and wealth inequality in the short run and that the systematic conduct of monetary policy in Norway dampens the distributional impact of business cycles on households.