| Abstract |
This paper contributes to the growing literature on the implications of monetary policy for income inequality by asking the questions: how does monetary policy impact the distribution of household income growth and how would the policy interact with the business-cycle implications for the distribution? We use comprehensive income information from the Canadian administrative tax records to document the cyclicality of the income-growth distribution, estimate the impacts of monetary policy shocks on income growth by income decile group and by major source of income, and assess how monetary policy amplifies or dampens the dynamics of income-growth distribution over the business cycle. Our findings confirm and broaden those of the literature in that the mean and the skewness of the income-growth distribution is significantly pro-cyclical, while the variance is weakly so, and hence, not counter-cyclical. We find that monetary policy tightening persistently lowers the growth of income for high income households more than for lower income households, reducing income inequality. Finally, monetary policy at the one-year horizon would counter the business-cycle-induced changes in the income-growth distribution and hence may stabilize the income inequality dynamics. |