[PPT] - The Effects of Monetary Policy Shocks on Inequality in Japan PowerPoint Presentation

SLIDE 1

Motivation Data & Estimation Model Results Conclusion

The Effects of Monetary Policy Shocks

n Inequality in Japan∗

Masayuki Inui Nao Sudo Tomoaki Yamada 10 November, 2017@Gerzensee

∗The views expressed are those of authors and do not necessarily reflect

those of the BOJ/BIS.

The Effects of Monetary Policy Shocks on Inequality in Japan

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SLIDE 2

Motivation Data & Estimation Model Results Conclusion

Motivation: growing interest on inequality

Impacts of monetary easing on inequality have attracted increasing attention recently

Cohan (2014): “Mr. Bernanke’s extraordinary QE program,

started in the wake of the financial crisis, has only widened the gulf between haves and have-nots.”

Krugman (2014): “The belief that QE systematically favors

the kinds of assets the wealthy own is wrong or at least

verstated.”
Bernanke (2015): “Monetary policy is a blunt tool which

certainly affects the distribution of income and wealth, although whether the net effect is to increase or reduce inequality is not clear.”

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Motivation Data & Estimation Model Results Conclusion

Existing empirical studies

Empirical observations are mixed

Coibion et al. (2017): Income and consumption inequality

across U.S. households respond counter-cyclically to monetary policy shocks

Saiki and Frost (2014): The opposite is true when using

Japanese data

Domanski et al. (2016): Unconventional monetary policy may

have widened wealth inequality, in particular through an upsurge in stock prices

Mummtaz and Theophipoulou (2016):

The Effects of Monetary Policy Shocks on Inequality in Japan

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Motivation Data & Estimation Model Results Conclusion

Questions raised

Question 1:

Does a monetary policy affects inequalities?

⇒YES

Question 2:

What transmission mechanism works?

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SLIDE 6

Motivation Data & Estimation Model Results Conclusion

What we do

This paper

Study the distributional effects of monetary policy, using the

micro-level data on Japanese households.

Draw the broad picture of the effects:
focusing on inequality measures of income, consumption, and

wealth based on the micro-level data

using both the theoretical model and the data
using a fairly long-span data sample: periods of conventional

and unconventional monetary policy regimes

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SLIDE 7

Motivation Data & Estimation Model Results Conclusion

Potential transmission channels

1. Earnings heterogeneity channel: Japan
the response of earnings to a monetary policy shock differs
2. Job creation channel
job creation/destruction following a MP shock
3. Income composition channel: US
the income composition of different income types differs
4. Portfolio channel
the size and composite of asset portfolio differs
5. Saving redistribution channel: Doepke and Schneider (2006)
a transfer from lenders to borrowers by a subsequent rise in

inflation caused by monetary easing

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Motivation Data & Estimation Model Results Conclusion

I. Data & Estimation

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SLIDE 9

Motivation Data & Estimation Model Results Conclusion

FIES

Family Income and Expenditure Survey (FIES)

Monthly survey on household income and expenditures
January 1981 – December 2008
The number of observations: 8,000
Panel data: 6 months
Two-or-more household members only
Focus on full-time employees (household head): 25–59
Self-employed, retirees and unemployed are excluded
Construct quarterly series of variables on economic inequality

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SLIDE 10

Motivation Data & Estimation Model Results Conclusion

FIES (cont.)

Definition of Variables

1. Earnings yL
Sum of labor income of all household members
2. Total income y: yL + capital income + private transfer
3. Disposable income yD: y + public transfers - taxes/premiums
4. Nondurable expenditures cND
Housing, purchasing cars and other durables are excluded
5. Total expenditure cT: cND + durables (housing excluded)
Equivalized by OECD equivalent scale

DETAILS The Effects of Monetary Policy Shocks on Inequality in Japan

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Motivation Data & Estimation Model Results Conclusion

Time path of inequality measures

Variance of log 1980 1985 1990 1995 2000 2005 2010 0.10 0.15 0.20 0.25 0.30 0.35 Recession yL y yD cT cND Gini coefficient 1980 1985 1990 1995 2000 2005 2010 0.20 0.22 0.24 0.26 0.28 0.30 Recession yL y yD cT cND P90-P10 ratio 1980 1985 1990 1995 2000 2005 2010 2.50 3.00 3.50 4.00 4.50 Recession yL y yD cT cND

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Motivation Data & Estimation Model Results Conclusion

Estimation methodology

Estimate the impulse responses of inequality measures to a monetary policy shock, using the LLP by Jord` a (2005): Yt+h

inequality at t+h

−Yt = αh + Πh(L)Mt +

εt+h

innovation

Mt =   ∆TFPt Factort ∆Rt  

⇐ Monetary policy variable

Advantages of LLP:
Robustness to model misspecifications:

⇒ choice of explanatory variables and the number of lags

Flexibility of model specifications

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Motivation Data & Estimation Model Results Conclusion

Monetary policy instrument

1980 1985 1990 1995 2000 2005 2010 2015

8
6
4
2

2 4 6 8 10 12 Annualized, %

Ueno (2017) Krippner (2015) JGB-2Y

Baseline: 1981Q1-1998Q4, Shadow rate: after 1999Q1

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Motivation Data & Estimation Model Results Conclusion

Monetary policy instrument

1980 1985 1990 1995 2000 2005 2010 2015

8
6
4
2

2 4 6 8 10 12 Annualized, %

Ueno (2017) Krippner (2015) JGB-2Y

Baseline: 1981Q1-1998Q4, Shadow rate: after 1999Q1

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Motivation Data & Estimation Model Results Conclusion

Responses of inequality measures: Baseline

10 20

0.005

0.000 0.005 0.010 Variance of log Earnings 10 20

0.005

0.000 0.005 0.010 Pre-tax income 10 20

0.005

0.000 0.005 0.010 Disposable income 10 20

0.005

0.000 0.005 0.010 Expenditure 10 20

0.005

0.000 0.005 0.010 Consumption 10 20

0.004
0.002

0.000 0.002 0.004 Gini 10 20

0.004
0.002

0.000 0.002 0.004 10 20

0.004
0.002

0.000 0.002 0.004 10 20

0.004
0.002

0.000 0.002 0.004 10 20

0.004
0.002

0.000 0.002 0.004 10 20 Quarter

0.050

0.000 0.050 0.100 P90-P10 10 20 Quarter

0.050

0.000 0.050 0.100 10 20 Quarter

0.050

0.000 0.050 0.100 10 20 Quarter

0.050

0.000 0.050 0.100 10 20 Quarter

0.050

0.000 0.050 0.100

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Motivation Data & Estimation Model Results Conclusion

U.S. Economy

Figure 4 in Coibion et al. (2017)

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Motivation Data & Estimation Model Results Conclusion

Channel through job creation

5 10 15 20

Quarter

15
10
5

(1) # of unemployed HH heads

5 10 15 20

Quarter

0.003
0.002
0.001

0.000 0.001 0.002

(2) The adjusted Gini of earnings Adjusted Gini The Effects of Monetary Policy Shocks on Inequality in Japan

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Motivation Data & Estimation Model Results Conclusion

Responses of inequality: 1981-2008

10 20

0.005

0.000 0.005 Variance of log Earnings 10 20

0.005

0.000 0.005 Pre-tax income 10 20

0.005

0.000 0.005 Disposable income 10 20

0.005

0.000 0.005 Expenditure 10 20

0.005

0.000 0.005 Consumption 10 20

0.003
0.002
0.001

0.000 0.001 0.002 0.003 Gini 10 20

0.003
0.002
0.001

0.000 0.001 0.002 0.003 10 20

0.003
0.002
0.001

0.000 0.001 0.002 0.003 10 20

0.003
0.002
0.001

0.000 0.001 0.002 0.003 10 20

0.003
0.002
0.001

0.000 0.001 0.002 0.003 10 20 Quarter

0.050

0.000 0.050 P90-P10 10 20 Quarter

0.050

0.000 0.050 10 20 Quarter

0.050

0.000 0.050 10 20 Quarter

0.050

0.000 0.050 10 20 Quarter

0.050

0.000 0.050

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SLIDE 19

Motivation Data & Estimation Model Results Conclusion

Changes in responses of earnings inequality

ver time

1996 1998 2000 2002 2004 2006 2008 End point of sample period

0.002

0.000 0.002 0.004 0.006 0.008 0.010 0.012 (1) Variance of log 1996 1998 2000 2002 2004 2006 2008 End point of sample period

0.001

0.000 0.001 0.002 0.003 0.004 (2) Gini coefficient 1996 1998 2000 2002 2004 2006 2008 End point of sample period

0.020

0.000 0.020 0.040 0.060 0.080 (3) P90-P10 ratio The Effects of Monetary Policy Shocks on Inequality in Japan

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Motivation Data & Estimation Model Results Conclusion

Empirical observations

Observation 1:

Impact of expansionary monetary policy on income inequality

is procyclical, arises mainly from procyclical response of earnings inequality. ⇒ Earnings heterogeneity channel

Once-prevailing distributional effects diminish during 2000s
Possibility that a decline in earnings inequality due to job

creation channel counters its rise from earnings heterogeneity channel Observation 2:

Transmission of income inequality to consumption inequality is

less than one-to-one

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SLIDE 21

Motivation Data & Estimation Model Results Conclusion

Accounting for observations

To address to these observations, we employ three toolkits:

1. Two-sector DSGE model with attached labor inputs
illustrate how the distributional effects of monetary policy

change with the structure of the economy

2. Industry-level aggregate data sets
3. Micro-level data on households’ financial assets and liabilities
check whether the model’s predictions accord with the data

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Motivation Data & Estimation Model Results Conclusion

II. Model

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SLIDE 23

Motivation Data & Estimation Model Results Conclusion

Literature: Theory

Models of inequality:

Monetary policy shock:
Guerrieri and Lorenzoni (2012), Gornemann et al. (2014),

Auclert (2015), McKay et al. (2016)

Fiscal policy:
Oh and Reis (2012), McKay and Reis (2015)
Income inequality and Pareto distribution:
Gabaix et al. (2016)
Business cycle and heterogeneity:
Challe, Matheron, Ragot, and Rubio-Ramirez (2015)
Mechanism behind earnings inequality in HANK

⇒ idiosyncratic risks (stochastic, but exogenous)

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Motivation Data & Estimation Model Results Conclusion

Our model

Two production sectors (X and Z)
each of which has final goods firms and intermediate goods

firms

consumption composite consists of goods X and goods Z
Two households (X and Z)
each of which has two types of members: “attached” and

“mobile”

“Attached” supplies its labor inputs to one of two sectors
“Mobile” can supply its labor inputs to both sectors

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Motivation Data & Estimation Model Results Conclusion

Objectives of households

Each type of households (X and Z) maximizes:

Us,t = Et [

∞

∑

q=0

βqu(Cs,t+q, Cs,t+q−1, Ns,t+q, Hs,t+q) ] u(·, ·, ·, ·, ) = log(Cs,t+q − bCs,t+q−1) − θ N1+η

s,t+q

1 + η − ϕ H1+η

s,t+q

1 + η

N: attached labor input, H: mobile labor input
β: discount factor, C: consumption, b: habit

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Motivation Data & Estimation Model Results Conclusion

Budget constraint

For s = X, Z, the budget constraint:

Cs,t + Bs,t Pt

≥

    

Ws,t Pt Ns,t + Wt Pt Hs,t

+

( ΠX,t+ΠZ,t

Pt

) γΠs + (RX,tKX +RZ,tKZ

Pt

) γKs

+Rt−1

Bs,t−1 Pt

+ κB

(

Bs,t Pt

)2      ,

γΠs: share of dividends, γKs: share of capital stock
κB: adjustment costs of bond holding
Capital stock is fixed at some level

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Motivation Data & Estimation Model Results Conclusion

Firm’s price setting and gross output

In sector X, the intermediate firm i choose the prices to solve:

max

PX,t(i) E

[

∞

∑

q=0

βt+q Λt+q Λt Πt+q,X(i) Pt+q ]

subject to

ΠX,t+q,X(i) = PX,t+q(i)xt+q(i) − MCX,t+q(i)xt+q(i)

− κX

2 ( PX,t+q(i) PX,t+q−1(i) − 1 )2 PX,t+qXt+q, xt(i) = ANX,t(i)αµUX,t(i)α(1−µ)KX,t(i)1−α

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Motivation Data & Estimation Model Results Conclusion

Rest of the model

Production technology of gross output:

¯ Xt = [∫ 1

0 xt(i)1− 1

ε di

]

ε ε−1

The aggregator constructs the composite of consumption

goods using the aggregate technology Ct = X ρ

t Z 1−ρ t

Monetary policy:

log Rt = ρn log Rt−1 + (1 − ρn)φ log πt + ϵR,t

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Motivation Data & Estimation Model Results Conclusion

Setup

Assume that ρ > 1 − ρ and κX > κZ
Other parameters are symmetric
Then,
X receives higher earnings than Z at steady state
Monetary policy affects two sectors differently around steady

state

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Motivation Data & Estimation Model Results Conclusion

Expansionary monetary policy shock

5 10 15 20

0.010

0.000 0.010 0.020 0.030 0.040 % (1) Value-added Sector X Sector Y 5 10 15 20

0.025
0.020
0.015
0.010
0.005

0.000 % (2) Relative price 5 10 15 20 0.000 0.010 0.020 0.030 0.040 % (3) Earnings Household X Household Y 5 10 15 20 Quarter 0.000 0.010 0.020 0.030 0.040 % (4) Consumption Household X Household Y 5 10 15 20 Quarter 0.000 0.005 0.010 0.015 0.020 0.025 0.030 % (5) Earnings inequality 5 10 15 20 Quarter 0.000 0.005 0.010 0.015 0.020 0.025 0.030 % (6) Consumption inequality

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SLIDE 31

Motivation Data & Estimation Model Results Conclusion

Labor market flexibility: µ ∈ {0.4, 0.6, 0.8}

5 10 15 20 0.00 0.01 0.02 0.03 0.04 (1) Earnings of household X high mid low 5 10 15 20 0.00 0.01 0.01 0.02 0.02 0.03 0.03 (2) Earnings of household Z high mid low 5 10 15 20 0.00 0.01 0.02 0.03 0.04 0.05 0.06 (3) Earnings inequality high mid low 5 10 15 20

0.01

0.00 0.01 0.02 0.03 0.04 0.05 (4) Consumption of household X high mid low 5 10 15 20

0.01

0.00 0.01 0.02 0.03 (5) Consumption of household Z high mid low 5 10 15 20 0.00 0.01 0.02 0.03 0.04 0.05 0.06 (6) Consumption inequality high mid low

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Motivation Data & Estimation Model Results Conclusion

Labor market flexibility in Japan

1985 1990 1995 2000 2005 2010 2015 Year 10 12 14 16 18 20 22 24 26 % (1) Proportion of temporary workers

Labor force survey Monthly labor surcey

1985 1990 1995 2000 2005 2010 2015 Year 3.0 3.2 3.4 3.6 3.8 4.0 % (2) Labor turnover ratio

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SLIDE 33

Motivation Data & Estimation Model Results Conclusion

Transmission to consumption inequality

Why didn’t consumption inequality increase as much as

income inequality?

Responses of consumption of households are all weak?
Or other possible explanations?

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SLIDE 34

Motivation Data & Estimation Model Results Conclusion

Responses of consumption and the MPC

5 10 15 20

0.010
0.005

0.000 0.005 0.010 0.015 0.020 0.025 (1) Consumption responses 0-20% 80-100% 5 10 15 20

0.02
0.02
0.01
0.01

0.00 0.01 0.01 0.02 0.02 0.03 0.03 (2) MPC responses 0-20% 80-100%

by income quintiles

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Motivation Data & Estimation Model Results Conclusion

Transmission to consumption inequality

Why is the MPC conditional on monetary policy shocks higher

in the low income quintile?

1. Distributional effects via financial asset holdings
2. Difference in consumption behavior across households

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Motivation Data & Estimation Model Results Conclusion

Distribution of financial assets matters

5 10 15 20 0.00 0.01 0.01 0.02 0.02 0.03 0.03 (1) Earnings inequality high mid low 5 10 15 20 0.00 0.01 0.01 0.02 0.02 0.03 0.03 (2) Consumption inequality high mid low 5 10 15 20

0.01

0.00 0.01 0.02 0.03 0.04 0.05 (3) Consumption of household X high mid low 5 10 15 20

0.01

0.00 0.01 0.02 0.03 (4) Consumption of household Z high mid low

γKX ∈ {0.4, 0.5, 0.6}

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Motivation Data & Estimation Model Results Conclusion

Conclusion

Empirically and theoretically study how monetary policy shocks are transmitted to inequality.

Findings:
Distributional effects of monetary policy were once present, but

have become statistically insignificant during the 2000s

Transmission of income inequality to consumption inequality is

minor

Takeaways:
Labor market flexibility is central to the dynamics of income

inequality after the monetary policy shocks

Distributions of financial assets and liabilities don’t play a

significant role

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Motivation Data & Estimation Model Results Conclusion

Danke sch¨

n!

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Motivation Data & Estimation Model Results Conclusion

Appendix Figures

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Motivation Data & Estimation Model Results Conclusion

Responses of macro variables

5 10 15 20

2

2 4 6 (1) GDP 5 10 15 20

5

5 10 15 (2) Investment 5 10 15 20

1

1 2 3 (3) Consumption 10 20

0.4
0.2

0.2 0.4 0.6 0.8 (4) Price Level 5 10 15 20 Quarter

10

10 20 (5) Stock Price 5 10 15 20 Quarter 1 2 3 (6) Labor Income 5 10 15 20 Quarter

2

2 4 6 (7) Capital Income 5 10 15 20 Quarter

10
5

5 (8) Unemployed

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Motivation Data & Estimation Model Results Conclusion

Cross-firm heterogeneity to earnings inequality: baseline

5 10 15 20

0.004
0.002

0.000 0.002 0.004 0.006 0.008 (1) Value-added 5 10 15 20

0.003
0.002
0.001

0.000 0.001 0.002 0.003 0.004 (2) Earnings per employee 5 10 15 20

0.001

0.000 0.001 0.002 0.003 0.004 (3) Earnings per working hour The Effects of Monetary Policy Shocks on Inequality in Japan

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Motivation Data & Estimation Model Results Conclusion

Cross-firm heterogeneity to earnings inequality: 1981-2008

5 10 15 20

0.004
0.002

0.000 0.002 0.004 0.006 0.008 (1) Value-added 5 10 15 20

0.004
0.003
0.002
0.001

0.000 0.001 0.002 0.003 0.004 0.005 (2) Earnings per employee 5 10 15 20

0.005
0.004
0.003
0.002
0.001

0.000 0.001 0.002 (3) Earnings per working hour The Effects of Monetary Policy Shocks on Inequality in Japan

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Motivation Data & Estimation Model Results Conclusion

Data Details

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Motivation Data & Estimation Model Results Conclusion

Data Details

Definition of Variables

Labor income y:
sum of monthly labor income of household members, which

include household head, his/her spouse and other household members

Nondurable expenditure c:
food; repair and maintenance of houses; fuel, light and water

charges; domestic utensils, non-durable goods, and services; clothing and footwear; medical care; transportation and communication, excluding purchase of vehicles and bicycles; education; culture and recreation, excluding recreational durable goods; and other consumption expenditure, excluding remittance

RETURN The Effects of Monetary Policy Shocks on Inequality in Japan

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Motivation Data & Estimation Model Results Conclusion

Adjusted Gini

Adjusted Gini coefficient G ∗ ≡ ∑

¯ N i=1 ∑ ¯ N j=1 |xi − xj|

2 ¯ N ∑

¯ N i=1

= G N

¯ N + ¯ N − N ¯ N

Assumption: earnings of unemployed = 0

RETURN The Effects of Monetary Policy Shocks on Inequality in Japan

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The Effects of Monetary Policy Shocks

Table of contents

Motivation: growing interest on inequality

Existing empirical studies

Questions raised

⇒YES

What we do

Potential transmission channels

FIES

FIES (cont.)

Time path of inequality measures

Estimation methodology

−Yt = αh + Πh(L)Mt +

⇐ Monetary policy variable

Monetary policy instrument

Monetary policy instrument

Responses of inequality measures: Baseline

U.S. Economy

Channel through job creation

Responses of inequality: 1981-2008

Changes in responses of earnings inequality

Empirical observations

Accounting for observations

Literature: Theory

⇒ idiosyncratic risks (stochastic, but exogenous)

Our model

Objectives of households

∑

Budget constraint

≥

+

+Rt−1

+ κB

Firm’s price setting and gross output

∑

− κX

Rest of the model

Setup

Expansionary monetary policy shock

Labor market flexibility: µ ∈ {0.4, 0.6, 0.8}

Labor market flexibility in Japan

Transmission to consumption inequality

Responses of consumption and the MPC

Transmission to consumption inequality

Distribution of financial assets matters

Conclusion

Danke sch¨

Responses of macro variables

Cross-firm heterogeneity to earnings inequality: baseline

Cross-firm heterogeneity to earnings inequality: 1981-2008

Data Details

Adjusted Gini

= G N