The Effect of Monetary Policy on Consumption Inequality: An Analysis of Transmission Channels through TANK Models

Abstract What transmission channels drive the effect of monetary policy on consumption inequality? This paper investigates this question with tractable Two‐Agent New Keynesian models with search‐and‐matching frictions and wage rigidities. I make a distinction between credit‐constrained households and unconstrained households and find that an expansionary monetary policy shock decreases consumption inequality between those two households through three channels: (i) the income composition channel, through fluctuations in labor and profit income; (ii) the savings redistribution channel, through fluctuations in real interest rate; and (iii) the earnings heterogeneity channel, through fluctuations in unemployment. The results are in line with the empirical evidence.