Research

We use high-frequency administrative data from Germany to study the effects of monetary policy on income and employment across the earnings distribution. Earnings growth at the bottom of the distribution is substantially more elastic to policy shocks. This unequal incidence is driven by differences in the response of employment risk across the distribution: job loss is more countercyclical for lower-earnings households. Viewed through the lens of a standard incomplete-markets model, the heterogeneous incidence substantially amplifies the equilibrium response of aggregate consumption to shocks.

Negative oil supply shocks since the 1980s have increased German inflation and reduced aggregate economic activity and prompted moderate monetary tightening to counter these inflationary effects. Using 45 years of high-frequency German administrative data, we find that these shocks disproportionally harm low-income individuals: their earnings growth falls by two percentage points two years after a 10-percent exogenous oil price rise, while high-income individuals are largely unaffected. Job-finding probabilities for low-income workers also decline significantly. This contrasts with the distributional effects of monetary policy shocks, which, while also stronger at the bottom, primarily impact job-separation probabilities. To understand the role of monetary policy in shaping these outcomes, we analyze counterfactual scenarios of policy non-response. Because the actual policy response to oil shocks involves an initial rate rise followed by a fall, a fully anticipated non-response (estimated following McKay and Wolf, 2023) leaves the oil shock’s aggregate and distributional effects little changed. When monetary policy repeatedly surprises by not reacting (following Sims and Zha, 2006), in contrast, the implied initial monetary loosening dominates, boosting activity, inflation, and particularly employment prospects for low-income individuals.

We quantify the relationship between the response of output to monetary policy shocks and the share of liquidity constrained households. We do so in the context of the euro area using a Local Projections Instrumental Variables estimation. We construct an instrument for changes in interest rates from changes in overnight indexed swap rates in a narrow time window around ECB announcements. Monetary policy shocks have heterogeneous effects on output across countries. Using micro data, we show that the elasticity of output to monetary policy is larger in countries that have a larger fraction of households that are liquidity constrained.

Earnings growth is more procyclical at the bottom of the income distribution than at the top. Using high-quality administrative data from Germany, I show that the heterogeneity is chiefly driven by transitions between employment and non-employment, specifically job-finding. I build a heterogeneous agent business cycle model that can rationalize these empirical findings. Agents in the model endogenously choose where to search for work in a labor market that features directed search. The model reproduces the heterogeneous procyclicality of earnings growth, as well as the contribution of job-finding, along the income distribution. I use this model to evaluate two policies aimed at reducing business cycle risk: countercyclical hiring subsidies and universal basic income (UBI). The first policy proposal increases welfare relative to the baseline economy. Implementing UBI decreases the volatility of aggregate consumption but decreases welfare overall.

Children disproportionately enter their parents’ occupations. We examine the implications of this tendency for intergenerational income mobility and talent allocation in the economy. Using Swedish data on cognitive and non-cognitive skills, we estimate a general-equilibrium Roy model in which access to occupations depends on parental occupation. Equalizing access reduces occupational following by roughly one-half and increases income mobility by about one-third without reducing output. Gains are concentrated among sons of low-earning fathers with skills suited to higher-paying occupations. Quasi-experimental evidence exploiting long-run employment declines in fathers’ occupations supports the model estimates: reduced following improves skill matching and raises earnings.