Monetary Policy, Endogenous Inequality and Equity Premium

The empirical evidence on how monetary policy affects inequality is mixed. We propose a model with endogenously segmented financial markets which can reconcile this contrasting em- pirical evidence. In addition to the conventional income composition channel (intensive margin), monetary policy in our model also affects inequality through a financial-inclusion margin channel (extensive margin) by altering the extent of financial participation. We show analytically that the two channels impact inequality in opposite ways and that the net impact depends upon (a) the extent of financial market exclusion and (b) the density of households at the margin of financial market participation in an economy.