Monetary Policy and Inequality in Australia

Abstract

Australia has experienced growing income and consumption inequality over the past three decades. As interest rates rise, it is important to understand the impact of monetary policy on household income and consumption. This thesis uses data from the Household, Income and Labour Dynamics in Australia survey to investigate the distributional effects of monetary policy and the channels through which monetary policy transmits to households. I use the local projections method and find that monetary policy has distributional effects. When interest rates rise, earnings inequality worsens and consumption inequality decreases. I find that the distributional effects of monetary policy are transmitted through the earnings heterogeneity, income composition, and portfolio composition channels.