This article summarises a recent working paper that examines how the Eurosystem’s quantitative easing has affected wealth and income inequality in the eurozone.
In a second stage, it distributes these estimated effects across individual households using the information on their assets and income from the Eurosystem Household Finance and Consumption Survey (HFCS).
“Quantitative easing” refers to central bank purchases of assets such as stocks and bonds to increase the money supply when interest rates are too low for conventional rate cuts to provide further policy accommodation. Quantitative easing in the euro area through the ECB’s asset purchase programme (APP) has stimulated economic activity and asset prices, affecting income and wealth inequality among households. It has decreased income inequality, mostly by reducing the unemployment rate for poorer households, but also, to a lesser extent, by increasing the wages of the employed. Quantitative easing has also helped to reduce net wealth inequality slightly through its positive impact on house prices.
During the recent years there has been a public debate about the effects of monetary policy on household inequality. An opinion piece published in the Financial Times in September 2015, for instance, argued that unconventional monetary policy increased inequality and “made the rich richer”, as it boosted asset prices and financial wealth. Other commentators have pointed out that a long period of low interest rates reduces the income of savers holding interest-bearing assets, while benefiting younger households that are net borrowers.
But when it comes to household inequality, monetary policy not only affects financial variables, such as the return to savings and the value of assets, but also employment, wages and incomes. These effects vary from household to household, depending on both the kind of financial assets owned, if any, and also – importantly – on the employment status of the adults in the household.
The working paper studies the effects of an APP shock represented by an “exogenous” drop in the term spread – the difference between the long-term and short-term interest rates – via its effect on the long-term interest rate (as the short-term rate remained at its lower bound). Specifically, the shock is assumed to reduce the term spread by 30 basis points, on impact. The macroeconomic effects on GDP, inflation, wages, unemployment and asset prices are estimated using a multi-country vector auto-regressive model (VAR). The model includes three categories of asset prices: house prices, stock prices and interest rates (which determine bond prices). Then, the aggregate effects are fed into a micro-simulation model which estimates the effects of quantitative easing on the income and wealth of individual households.
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