Monetary policy and income inequality in Brazil: structural vector autoregressive approach

The main objective of this study is to investigate the impact of monetary policy shock on income inequality in Brazil. To estimate the Structural Vector Autoregressive (SVAR) model, time series data is gathered from the first quarter of 1998 to the last quarter of 2021. Results from the SVAR model indicated that the impulse response of income inequality to a positive shock in monetary policy rate is positive and significant. The implication is that contractionary monetary policy propagates income inequality through earning heterogeneity and saving redistribution channels. A positive shock in private credit reduces income inequality both in the short run and long run. Moreover, the response of income inequality to a shock in inflation and the unemployment rate is positive and significant. Lastly, the variance decomposition factor results revealed that 36.19%, 17.8%, and 4% of the variation in income inequality came from private credit, real GDP growth, and unemployment rate respectively. Any policy that targets fair income distribution in Brazil should enhance access to credit for many of the poor and decrease the unemployment rate.