The Effect of Monetary Policy on Consumption Inequality: An Analysis of Transmission Channels through TANK Models

• Published date: 01 August 2023
• Author: MOMO KOMATSU
• Date: 01 August 2023
• DOI: http://doi.org/10.1111/jmcb.12986

DOI: 10.1111/jmcb.12986

MOMO KOMATSU

The Effect of Monetary Policy on Consumption

Inequality: An Analysis of Transmission Channels

through TANK Models

What transmission channels drive the effect of monetary policy on con-

sumption inequality? This paper investigates this question with tractable

Two-AgentNew Keynesian models with search-and-matching frictions and

wage rigidities. I make a distinction between credit-constrained households

and unconstrained households and nd that an expansionary monetary pol-

icy shock decreases consumption inequality between those two households

through three channels: (i) the income composition channel, through uc-

tuations in labor and prot income; (ii) the savings redistribution channel,

through uctuations in real interest rate; and (iii) the earnings heterogeneity

channel, through uctuations in unemployment. The results are in line with

the empirical evidence.

JEL codes: E17, E24

Keywords: constrained households, consumption inequality, monetary

policy, transmission channels

I  , I  the effects of monetary policyon con-

sumption inequality through tractable Two-Agent New Keynesian (TANK) models

with search-and-matching frictions and wage rigidities. Distributional consequences

of monetary policy are also of interest to central bankers, even though such conse-

quences are not their primary concern (Carney 2016 , Draghi 2016, Yellen2016). The

I would like to thank Andrea Ferrero for his support and helpful advice throughout the research project.

I also wish to thank David Vines for our insightful conversations.I would like to thank the International

Monetary Fund for funding my DPhil (PhD) degree through the Japan-IMF Scholarship Programme. Dec-

larations of interest: none

M Kis at the Department of Economics and St Edmund Hall, University of Oxford (E-mail:

momo.komatsu@economics.ox.ac.uk).

Received January 10, 2022; and accepted in revised form August 17, 2022.

Journal of Money, Credit and Banking, Vol. 55, No. 5 (August 2023)

© 2022 The Authors. Journal of Money, Credit and Banking published by Wiley Periodicals

LLC on behalf of Ohio State University.

This is an open access article under the terms of the Creative Commons Attribution License,

which permits use, distribution and reproduction in any medium, provided the original work

is properly cited.

1246 :MONEY,CREDIT AND BANKING

main contribution of this paper is that it replicates analytically and tractably the main

transmission channels of monetary policy to inequality found in empirical literature.

This paper investigates the transmission channels that drive the effectof monetary

policy to consumption inequality. I develop a TANK model based on the model pro-

posed by Debortoli and Galí (2018) in which a fraction of the households are credit-

constrained and consume hand-to-mouth. The rest of the population has access to the

asset market and smooth consumption. I add search-and-matching frictions1follow-

ing the methods by Blanchard and Galí (2010) and Dolado, Motyovszki, and Pappa

(2021) and obtain the search-and-matching TANK (SAMTANK). With the search-

and-matching frictions, I allow for unemployment, which, according to empirical

literature, is important in the dynamics of inequality under monetary policy shocks

(Coibion et al. 2017, Lenza and Slacalek 2018). I allow for wage rigidities following

the method by Gertler and Trigari (2009) to amplify the effect of unemployment.

My main result is that expansionary monetary policy shocks decrease consump-

tion inequality through the savings redistribution channel, the income composition

channel, and the earnings heterogeneity channel. The existing literature differenti-

ates between two kinds of transmission channels: (i) ination channels, capturing the

redistributive effect when goods or asset prices change as a consequence of monetary

policy, and (ii) income channels, capturing the redistributive effect of real changes,

for example, in output or employment, from monetary policy (Nakajima 2015). The

savings distribution channel is an ination channel, whereas the income composition

channel and the earnings heterogeneity channels are income channels.

The savings distribution channel explains distributional effects by changes in real

interest rates (Doepke and Schneider 2006, Guerello 2018). In my models changes in

the real interest rate affect the consumption of unconstrained households but not of

constrained households. Therefore, changes in real interest rates have an asymmetric

effect on the types of households.

The income composition channel takes into account the differences between the

sources of income of households and how monetary policy affects these sources

(Davtyan 2017). Most low-income households only depend on labor income, while

more privileged households also enjoy income from capital and prots. The models

in this paper feature such a setup too. When monetary policy affects different sources

of income heterogeneously, the income composition channel is at work (Guerello

2018).

The earnings heterogeneity channel explains the heterogeneous effects of mone-

tary policy on inequality through different labor market conditions of low- and high-

income households (Casiraghi et al. 2018). For example, unemployment rate and job

separation rate is higher for relatively low-skilled people who are most likely to be in

low-income households (Hobijn and ¸Sahin 2009). Moreover, matching efciency of

vacancies and unemployed people uctuates more with output for low-incomegroups

1. Commonly known as the Diamond–Mortensen–Pissarides frictions, as proposed by Mortensen and

Pissarides (1994)