Monetary Policy and Household Inequality in Income and Consumption

Purpose – This study investigates how monetary policy affects income and consumption inequality across household income groups in South Korea, focusing on the heterogeneous responses of wage and property income. Design/Methodology – We employ a Bayesian sign-restricted structural vector autoregression (B-SVAR) framework, complemented by a long-run restriction SVAR for robustness, to estimate the effects of short-term interest rate shocks from the U.S. and Korea. The model uses quintile-level data on wage income, property income, and consumption from 2003 to 2023. Impulse response functions based on Monte Carlo simulations trace the heterogeneous distributional impacts. Findings – U.S. monetary tightening is rapidly transmitted to Korean policy rates, underscoring Korea’s exposure to external monetary conditions. Domestic monetary policy shocks increase both income and consumption inequality in the short run, but with pronounced asymmetries. Wage income among low-income households reacts sharply yet temporarily, whereas property income among high-income households exhibits more persistent responses. Variance decompositions further indicate that inequality feeds back into policy dynamics, amplifying the vulnerability of lowincome households during downturns. Originality/value – This study provides new evidence of the unequal transmission of monetary policy across income groups in the context of a small open economy. Employing quintile-level data and the sign-restricted B-SVAR framework, this analysis highlights the asymmetric and persistent effects of rate shocks, especially through property income and consumption inequality, as an underexplored dimension of monetary policy research.