Monetary Policy and Inequality in a Small Open Economy

We study the impact of monetary policy on income and wealth distributions ina small open economy. To do so, we use household-level registry and surveydata from Finland, a small member of a monetary union. This setup allows usto circumvent endogeneity issues and thus helps achieve causal interpretation.We find that expansionary monetary shocks stimulate economic activity,earnings, and asset prices, while barely affecting income and wealth inequality.The reduction in unemployment mostly benefits households in lower incomequintiles, where the initial rate of unemployment is high. Households in upperincome quintiles, where the rate of employment is higher, benefit relativelymore from higher wages. Higher house prices increase the net wealth of allhomeowners. However, due to a leverage effect, households with largemortgages located in the lower net wealth quintiles benefit most. Rising stockprices, in turn, benefit mainly households in the top net wealth quintile. Overall,these different channels have counteracting effects on income and wealthinequality