Abstract
Empirical evidence on the effect of income inequality on monetary policy transmission to bank interest rates remains scarce, despite few theoretical and empirical contributions suggesting that inequality might influence the response of economic agents to monetary policy shocks. We develop a novel measure of income inequality to investigate the effect of inequality on the transmission of monetary policy to bank loan rates.
Using a panel of euro area countries over the years 2008-2016, we find that income inequality influences the transmission of monetary policy to bank loan rates over the long-term. The effect of income inequality on monetary transmission is heterogeneous across the different loan market segments and monetary policy measures.
More specifically, higher income inequality hinders the transmission of standard monetary policy to consumer loan rates and limits the transmission of unconventional monetary policy to housing loan rates. Conversely, higher inequality improves monetary transmission to small firm loan segment.