Asset purchases, limited asset markets participation and inequality

This paper analyses the effects of quantitative easing (QE) on households' income and consumption inequality in the Euro Area. Using a SVAR with high frequency identification, I show that an identified QE shock is redistributive and expansionary. To rationalize the empirical findings, I build a New Keynesian DSGE model with household heterogeneity and financial frictions which explains the empirical results and provides insights on the inequality channel. Bond purchases increase aggregate demand and benefit financially restricted households more than investors, due to the dominance of QE's indirect effects and the foregoing term spread between bonds and reserves. Thus, income and consumption inequality decline in line with the evidence.