Labour income inequality and the credit channel of monetary policy: Evidence from Belgium
Research at the University of Liverpool in partnership with the National Bank of Belgium (NBB), investigates how monetary policy affects firms’ access to credit, their employment of high- and low-skilled workers, and aggregate demand.
The project aims to provide central banks with new evidence on the relationship between monetary policy, firm credit, labour market inequality and household spending.
Background
Central banks use monetary policy, particularly changes in interest rates, to manage inflation and stabilise economic activity. These decisions affect the economy through several mechanisms, including the credit channel, through which monetary policy influences the cost and availability of finance.
Firms that rely heavily on bank lending may be particularly affected when credit conditions tighten. They may respond by reducing recruitment, changing the composition of their workforce or making other adjustments to employment. These decisions may affect high- and low-skilled workers differently, with consequences for labour income inequality.
The effects may also extend to the wider economy. Different groups of workers vary in how much of their income they spend, meaning that changes in employment and earnings can affect household consumption and aggregate demand.
However, the links between the credit channel, labour market inequality and aggregate demand have received relatively limited attention in existing research.
Our research
Led by Dr Alexey Gorn, working with Marco Valerio Geraci and Salima Ouerk at the NBB, the project combines detailed empirical analysis with quantitative economic modelling.
The team constructed and analysed a novel dataset using information held by the NBB on firms’ credit relationships, financial positions and employment. This enabled the researchers to examine how monetary policy shocks affect the credit available to financially constrained firms and how these firms subsequently adjust their employment of high- and low-skilled workers.
Building on this evidence, the researchers developed a theoretical model that captures the credit channel of monetary policy while incorporating firm and worker heterogeneity. The model connects changes in firms’ access to credit with their employment decisions and traces the resulting effects on workers’ incomes, household consumption and aggregate demand.
The emerging findings have also informed initial recommendations for monetary policy and banking and credit regulation. These recommendations have been discussed with researchers at the NBB and presented at a workshop supported by the University’s Economic and Social Research Council (ESRC) Impact Acceleration Account (IAA), attended by central bankers, researchers and policymakers. The discussions provided valuable feedback that will inform the project’s continuing analysis and the further development of its policy recommendations.
The impact
The project has generated new empirical evidence on how monetary policy is transmitted through firms and into the labour market. It has also advanced a quantitative framework for assessing how the employment and income effects of monetary policy contribute to fluctuations in aggregate demand.
The findings will help central banks take greater account of labour market inequality when analysing and implementing monetary policy. If lower-skilled workers are particularly exposed to employment adjustments by credit-constrained firms, changes in monetary policy may have important distributional consequences. As lower-income workers may spend a relatively high proportion of their earnings, these effects may also influence the overall strength of monetary policy transmission.
The research is expected to inform future policy discussions within the NBB and across wider central banking networks. It will also support further academic and policy-focused outputs, continued engagement with policymakers, and the refinement of recommendations for monetary policy and credit regulation.
Working in partnership
The partnership combines the University of Liverpool’s expertise in macroeconomics, inequality and quantitative modelling with the NBB’s policy expertise and access to detailed administrative data. NBB researchers have led the empirical analysis, while Dr Gorn has led the theoretical modelling.
Support from the University’s ESRC IAA has enabled research visits, sustained collaboration and engagement with policymakers. The project has strengthened the institutional relationship between the University and the NBB, while establishing a platform for further joint research, funding applications, workshops and engagement with the wider central banking community.
