Few topics have moved as decisively from the margins to the centre of economic policy debate as inequality. As Atkinson and Morelli (2014) noted when introducing the Chartbook of Economic Inequality, the subject was long ignored before becoming central to global policy discussions, a shift accelerated by the 2008 financial crisis (Waldenström 2024). Increasingly, the debate over inequality has spilled out of pure distributional analysis into stabilisation policies, including monetary policy. For example, heterogeneous-agent New Keynesian (HANK) models suggest that consumption dispersion, not just aggregate consumption, matters for policy, with inequality reshaping how aggregate demand responds to shocks when households are borrowing-constrained (Acharya 2023). There is also evidence that causality may run both ways: softer monetary policy itself raises top income shares and lowers those at the bottom, shifting disposable income toward the top 1% over a two-year horizon for a one-percentage-point rate cut, while monetary tightening aggravates regional inequality and easing mitigates it (Andersen et al. 2021, Hauptmeier et al. 2020). 

These contributions have mostly addressed the domestic dimension of the interaction between monetary policy and inequality. In a recent paper (Arrigoni and Ferrari Minesso 2026), we take a cross-country perspective and examine how the global transmission of US monetary policy changes depending on household heterogeneity. In particular, we show that within-country income inequality is an important factor behind cross-country differences in the strength of US monetary policy spillovers.

Conceptualising the role of inequality

Why should inequality matter for international spillovers? While standard open-economy models often focus on transmission mechanisms that abstract from household heterogeneity, in practice the domestic distribution of income and wealth shapes who participate in financial markets, who adjusts spending after a shock, and how capital flows respond to changes in global financial conditions. In highly unequal economies, for example, economic activity may become more sensitive to foreign monetary tightening because a larger fraction of resources is held by households exposed to international financial markets, while poorer households face tighter borrowing constraints and weaker consumption smoothing. Inequality therefore can influence the strength of the transmission mechanisms of foreign monetary policy, particularly through the financial channel. In this column, we exploit the substantial variation in inequality both between and within advanced and emerging market economies (Figure 1) to quantify the strength of this channel.

Figure 1 Within-country inequality in disposable income

Notes: Average Gini coefficient of disposable income by country over the period 1966–2020, based on data from the Standardized World Income Inequality Database (SWIID).

Heterogeneous spillover effects of US monetary policy 

Using data for a large sample of 87 advanced and emerging economies over more than 50 years, we estimate the heterogeneous effects of a US monetary policy tightening on the real GDP of foreign economies depending on their level of disposable income inequality. We first construct a measure of US monetary policy shocks following Iacoviello and Navarro (2019), capturing movements in interest rates orthogonal to domestic and global economic conditions. Then we employ state-dependent local projections as in Cloyne et al. (2023) to isolate the spillover effects of those shocks depending on the level of inequality (proxied by the Gini coefficient of disposable income).

Our estimates uncover two main findings. First, across countries, higher income inequality tends to amplify the negative impact of a US monetary policy tightening on economic activity (Figure 2a, left panel). Second, when unpacking country heterogeneity, we show that the role of inequality differs markedly between advanced and emerging market economies (Figure 2a, centre and right panels). In advanced economies, higher inequality consistently strengthens the contractionary effects of US monetary policy. By contrast, across emerging markets higher inequality appears to mitigate these negative spillovers, resulting in smaller declines in economic activity.

Figure 2 Heterogeneous effects of US monetary policy on foreign economies’ GDP and consumption

a) GDP

b) Consumption

Notes: Impulse responses to a monetary policy shock that increases the federal funds rate (FFR) by 1 percentage point, estimated using local projections. The solid line represents the point estimate, while the dark and light shaded areas correspond to the 68% and 90% confidence bands, respectively. The direct effect (beta) captures the impact of the shock when inequality is at its average level. The other two lines represent the responses when inequality is at the 75th and 90th percentiles of the cross-country and time distribution.

Consumption responses (Figure 2b) already offer a preliminary insight into the reason for the divergence. In advanced economies, consumption declines more the higher is inequality following a US tightening. That could be consistent with wealthier households reallocating their wealth toward higher‑yielding foreign assets and reducing domestic spending. In contrast, in emerging markets, consumption falls by less when inequality is higher. This may reflect the limited ability of even richer households to shift portfolios abroad to seek higher yields. Income, by contrast, stays largely domestic. Households keep their resources at home, smoothing consumption and supporting domestic demand.

To test this hypothesis, we focus on the financial channel of transmission and examine how inequality interacts with access to international financial markets. To do so, the baseline empirical regression is expanded to account for the role of financial integration proxied by cross-country data on financial openness. Figure 3 shows how the elasticity of domestic output to US financial shocks changes depending on both the level of financial openness (high or low) and inequality (average, 75th percentile in blue, and 90th percentile in green). These results provide a clearer interpretation of our baseline findings and show how financial openness and inequality interact. When financial openness is low, higher inequality reduces the negative effects of US policy spillovers on domestic GDP. When financial openness is high, growing inequality is associated instead with a larger contraction of activity. These effects increase with the response horizon as inequality increasingly shapes the transmission of external shocks as financial adjustments unfold over time.

Figure 3 Marginal effects of US monetary policy on foreign economies’ GDP: inequality and financial openness 

Notes: The figure reports the predicted marginal effects, i.e. changes in real GDP following a monetary policy shock that increases the FFR by 1 percentage point, at different levels of financial openness (25th percentile (low), average, and 75th percentile (high)) and disposable income inequality (average, 75th, and 90th percentiles). The estimation includes the whole sample of 87 countries.

In our paper, we rely on a multi-country theoretical model to explain why inequality and access to international financial markets jointly shape the transmission of US monetary policy. Spillovers are shaped by how easily wealthier households can rebalance their domestic and foreign asset holdings following higher US rates. In advanced economies, where financial frictions are low and access to global markets is broad, wealthier households can shift their portfolios toward foreign assets following a US monetary tightening, in search of higher returns. This reallocation deepens capital outflows and amplifies the domestic downturn. By contrast, this mechanism is much weaker, or even muted, in emerging market economies where regulatory barriers, higher transaction and information costs, strong home bias, and limited access to financial services (Klapper et al. 2025) constrain even wealthier households’ ability to invest abroad. As a result, they are less able to reallocate portfolios toward US assets and instead keep a relatively higher share of their wealth invested domestically. This means that even in a scenario of high inequality, capital outflows are weakened, and the transmission of US monetary policy is dampened.  

Overall, our findings suggest that while inequality determines the magnitude of the effect of a US monetary policy shock on foreign GDP, financial openness shapes the direction and determines whether higher inequality amplifies or mitigates the impact. 

Conclusion

By combining evidence from a large set of countries with a theoretical framework, this column provides new insights into the global transmission of monetary policy in an increasingly interconnected and unequal world. The findings suggest that both the domestic income distribution and the structure of financial markets are crucial for understanding how global monetary shocks propagate across countries. They also highlight that policies aimed at improving financial inclusion and market access can influence not only domestic economic outcomes but also a country’s exposure to international financial conditions. Overall, our findings underscore that inequality is not only a social concern but also a ‘first-order’ macroeconomic factor shaping how economies respond to international developments.

References

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Acharya, S, O Akinci, S Miranda-Agrippino, and P Pesenti (2025), “Monetary policy spillovers in the global economy”, VoxEU.org, 7 April.

Andersen, A L, N Johannesen, M Jørgensen, and J-L Peydró (2021), “Softer monetary policy increases inequality”, VoxEU.org, 19 April.

Arrigoni, S and M Ferrari Minesso (2026), “Beyond Borders, Within Societies: Inequality and the Global Transmission of US Monetary Policy”, Banque de France Working Paper 1043.

Arrigoni, S and M Ferrari Minesso (2026), “Beyond Borders, Within Societies: Inequality and the Global Transmission of US Monetary Policy”, ECB Working Paper 3221.

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