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Department of Economics Seminar with Professor Federica Romei, University of Oxford Inequality, Expenditure Composition, and the Transmission of Monetary Policy
Professor Romei's primary fields of research are in monetary economics and international economics.
Abstract: This paper studies the role of expenditure composition in shaping the transmission of monetary policy across countries in a monetary union. We show that economies with a higher share of non-tradable consumption exhibit weaker output responses to monetary policy shocks, in the euro area. Income inequality is a key determinant of non-tradable consumption shares, as households with higher income allocate more of their consumption to non-tradables. Using both micro and macro data across euro-area countries, we show that countries with higher income inequality exhibit a larger share of non-tradable consumption and, consequently, a weaker response to monetary policy shocks. We rationalize these empirical findings through a model featuring heterogeneous agents, non-homothetic preferences, and incomplete markets. The model underscores how cross-country differences in income distribution and consumption patterns shape the transmission of monetary policy.