Inequality, heterogeneous agents, and the transmission channels of monetary policy: a survey

This paper reviews the transmission channels of both conventional and unconventional monetary policy, including income composition, earnings heterogeneity, interest rate exposure, savings redistribution, inflation tax, portfolio composition, and household debt, with a focus on their impact on income and wealth inequality. The survey highlights the crucial role of household heterogeneity in shaping the transmission of monetary policy and its differential effects on income and wealth distribution. These effects operate through several factors, including the primary source of income, employment status, net debtor or net saver positions, differences in portfolio composition, and debt levels. The paper also discusses the shadow banking sector to illustrate the relationship between monetary policy and inequality in a complex financial system. Overall, the paper provides policymakers with a guide to the multifaceted nature of the monetary policy–inequality nexus, given the pervasiveness of household heterogeneity. It also suggests avenues for further research on the combined effects of different transmission channels using macroeconomic models suited to this purpose, such as agent-based models (ABM) with heterogeneous interacting agents.