The Impact of Domestic Monetary Policy and External Liquidity Shocks on Inequality in the Republic of Korea

Lee, Dong Jin; Hahm, Joon-Ho; Park, Cyn-Young

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Dong Jin Lee, ¹ Joon-Ho Hahm, ² Cyn-Young Park, ³

¹Sangmyung University, Seoul, Republic of Korea
²Yonsei University, Seoul, Republic of Korea
³SEACEN Center, Kuala Lumpur, Malaysia

Corresponding Author: Dong Jin Lee ,Tel: +82-2-2287-6123, Email: rheedj@smu.ac.kr

ABSTRACT

This paper investigates the relationship between monetary policy and economic inequalities in the Republic of Korea. We consider both domestic and external monetary conditions in the analysis, allowing us to examine their varied impacts on income and wealth inequalities. Using data from the Household Income and Expenditure Survey and the Korean Labor and Income Panel Study, we find that an expansionary domestic monetary policy shock tends to reduce income inequality, while its effect on net wealth inequality is negligible. Conversely, an expansionary external liquidity shock, as indicated by unanticipated net capital inflows, tends to reduce income inequality but exacerbates net asset inequality. These findings suggest that both domestic monetary policy and external liquidity shocks affect economic inequalities, but through different channels.

JEL Classification

D30: General
D63: Equity, Justice, Inequality, and Other Normative Criteria and Measurement
E52: Monetary Policy
E58: Central Banks and Their Policies
F42: International Policy Coordination and Transmission

Keywords: Income Inequality | External Liquidity Shock | Monetary Policy | Sign Restricted VAR | Wealth Inequality