Inequality and transmission channels of monetary policy in a macro agent-based model

This study examines the impact of monetary policy on income and wealth inequality through several transmission channels, including income composition, earnings heterogeneity, saving redistribution, portfolio composition, and household debt. Using an agent-based stock-flow-consistent model, the study finds that a permanent increase in the policy rate raises unemployment and reduces firm dividends, hitting net debtors harder than net savers and worsening income inequality. In addition, the savings redistribution channel contributes to the increase in the income of net savers. Furthermore, the study shows that a higher policy rate also leads to lower asset values accumulation, especially for the poorest households, thereby exacerbating wealth inequality through the portfolio composition channel. • How monetary policy affects income and wealth inequality via several transmission channels. • Results show contractionary policy exacerbates inequality, especially for net debtors. • Earnings heterogeneity and income composition are the main channels through which inequality is transmitted. • Portfolio and debt channels raise wealth gaps even without asset-price dynamics. • Findings motivate targeted relief for highly indebted households during tightening.