The Effect of UMPs and QE on Income Inequality within the Euro area under an SVAR Framework with Zero and Sign Restrictions

As a response to the financial crisis of 2007/8, the European Central Bank (ECB) applied a series of unconventional monetary policies (UMPs). ECB introduced Quantitative Easing together with forward guidance when its key policy rates reached the Zero Lower Bound (ZLB), expanding its balance sheet massively and converting it into an alternative policy tool. This paper examines the effect that UMPs and specifically QE have on income inequality, comparing two different transmission channels in the same Structural VAR model and identifying which one dominates the most. In order to identify the UMP shock in such a multivariate SVAR model that contains 9 variables, zero and sign restrictions have been applied. The timespan of this paper is between 2008 and 2019, and the frequency is quarterly. Evidence of the implementation of this model is retrieved by three European countries, Germany, France, and Belgium. We find that income inequality decreases in France and Belgium, while the German case is more obscure.