Monetary policy shocks, transmission mechanisms, and income distribution : empirical evidence from Chile

Abstract

This research identifies monetary policy shocks by orthogonalizing changes in the monetary policy rate with central bank forecast information and market expectations. Ensuring exogeneity, we control for the predictability of highfrequency and narrative approaches using pre-announcement data. Additionally, we leverage survey data to construct surprises as a robustness measure. Utilizing a Bayesian framework, we quantify the impacts of a contractionary monetary policy shock on the aggregate economy. Our findings align with conventional macroeconomic theory and effectively address price and output puzzles. The paper further explores income inequality in the Chilean economy by analyzing labor income distribution using microeconomic data and impulse response functions within a microsimulation framework. This method allows us to distribute aggregate responses to monetary policy shocks across micro-level data, facilitating a detailed examination of the impact on employment status and nominal gross income. We find that the impact on income inequality, while present, is minimal. The extensive margin affects lower quintiles through employment status fluctuations, while the intensive margin impacts higher quintiles less due to their diversified income sources and assets.