Asymmetric Long‐Run Effects of Monetary Policy on Generational Inequality

ABSTRACT This paper investigates the asymmetric long‐run effects of reversing contractionary monetary policy to expansionary policy on generational inequality in the UK using non‐linear autoregressive distributed lag (NARDL). The results show that there exists a long‐term relationship between monetary policy and income, consumption, and wealth inequality. This study finds that contractionary monetary policy is more likely to have a more pronounced impact on inequality than expansionary monetary policy. A decision by the central bank to change a contractionary policy to an expansionary policy may not necessarily reverse the negative impact caused by the former. These findings imply that policymakers should account for the persistent and asymmetric distributional consequences of monetary tightening, particularly its disproportionate burden on younger cohorts. Monetary authorities may therefore need to complement contractionary measures with targeted macroprudential interventions to mitigate long‐lasting inequality effects and avoid intergenerational disparities becoming entrenched. JEL Classification: C32, D31, E21, E43, E52