Conference Agenda

This paper contributes to studying the impacts of monetary policy on labour income inequality

in the euro area using subnational regional data on compensation per employee. The dataset

covers 932 NUTS3 regions from 16 countries over the period 2000 – 2022 at a yearly

frequency. Using sub-sample analysis combined with local projections, the results show that

monetary policy rate changes have heterogeneous effects on the growth of real compensation

per employee (deflated by the GDP deflator) at both the bottom and upper ends of the regional

distribution within individual countries. From the whole euro area perspective, monetary policy

tightening has a heterogeneous effect on labour incomes between regions - in times of monetary

policy easing, shortening the gap between average low- and high-income regions.

We show that bank-level deposit flows shape the heterogeneous transmission of monetary policy through asset-side portfolio rebalancing. In all monetary policy tightening cycles, deposits reallocate within the banking sector resulting in some banks gaining deposits (gainers) while some banks losing deposits (losers). During high-rate environments, banks’ long-term securities depreciate resulting in losses for banks, while lending becomes more profitable. Deposit losers increase their reliance on wholesale funding, which is typically more costly than retail deposit financing. The increase in financing costs incentivises these banks to rebalance their asset portfolio from securities to loans to profit from the high-rate environment. Since gainers do not experience this increased financing costs, they refrain from portfolio rebalancing during the monetary policy tightening cycles because there are associated costs, such as capital loss and liquidity costs. Since, the loser banks experience higher cost of funding, they charge an equivalent high interest rate on their loans. Thus, in a tightening cycle, a higher number of deposit loser banks strengthens the price channel of monetary policy transmission but weakens the lending channel of monetary policy transmission.

Standard macroeconomic theory shows that hiking interest rates reduces inflation. However, Argentina's recent history of an active contractionary monetary policy stance and increasing inflation gives the impression of a conflict with this mainstream view. I construct monthly monetary policy shocks, first as deviations from the Central Bank's policy rule, following Romer & Romer (2004), and secondly as daily forward premium to overcome a potential "price puzzle", this is an unexpected increase in inflation from contractionary monetary policy in VAR models due to misspecification, following Witheridge (2024), to estimate the dynamic responses of inflation, economic growth and exchange rate to higher interest rates. Results suggest that, as opposed to standard macroeconomic theory, a 10% hike in the monetary policy rate unequivocally increases headline inflation using both approaches. These results are robust to different models (SVAR vs local projections), different approaches (one-step vs two-step), endogeneity (using instrumental variables), and misspecification, as I control directly by monetary and exchange rate regime changes (currency crisis, inflation targeting, FX controls, etc.). I theorize, building on the framework developed in Werning (2024) and Rodriguez (1986), that this seemingly unconventional result is actually consistent with standard macroeconomic theory: in a fiscal-led regime, inflation increases after an interest rate hike if and when a Central Bank uses interest-bearing liabilities as an active policy stance, offsetting present inflation for future inflation.

Against the backdrop of the 2007-2009 global financial crisis, central banks intervened to stabilize, in particular, financial markets by supplying, through conventional and unconventional monetary policies, liquidity to financial institutions and markets. This an illustration of the objective of this article consisting in examining the interplay between monetary policy and stock market liquidity between 1962 and 2017 for NYSE/AMEX and NASDAQ markets. We derive four main results. (i) There is little evidence on the (linear) impact of monetary policy on stock market liquidity; only market variables are significant determinants of liquidity. (ii) More specifically, focusing on relatively recent unconventional monetary policy instruments, we found that quantitative easing is ineffective in explaining market liquidity. (iii) In contrast, by using a Markov switching-regime model, our findings indicate that monetary policy has an asymmetric impact on stock market liquidity depending on the market liquidity regime, low or high. (iv) To the extent that uncertainty about the future monetary policy influences the transmission of monetary policy shocks to financial markets, we study the relationship between monetary policy uncertainty (MPU) and market liquidity. Our results suggest that market liquidity has a significant impact on MPU, while the opposite does not hold.