Job Market Paper
Federal Reserve Monetary Policy and Wealth Inequality: An instrumental-variable local projections approach (2023)
A frequent refrain by the central bank community is that monetary policy has at worst minor and transitory effects on inequality. This paper assesses this claim using high-frequency aggregate data on real net wealth for the United States from two sources: Realtime Inequality (1976-2012) and the Federal Reserve’s Distributional Financial Accounts (1989-2012). The impact of monetary policy shocks on wealth distribution is estimated using the instrumental-variable local projections (LP-IV) approach. The paper finds that expansionary monetary policy has positive and persistent effects on wealth inequality as measured by the Gini coefficient over the medium term, systematically increasing the share of wealth for the top 10% and 1% and shrinking the share for the bottom 50 and middle 40% of the distribution. The analysis also finds that the distributional effect of monetary policy has varied over time; the effects between 1976 and 1980 are modest in magnitude and transient relative to the 1990s and 2000s prior to the Great Financial Crisis. Expansionary policy increases inequality regardless of the business cycle; however, its effects are more substantial during economic expansions. The contribution of monetary policy to historical variation in wealth inequality is estimated, which suggests monetary policy accounts for as much as 15-16 percent of the increase in wealth inequality as measured by Realtime Inequality.
© 2023 Aaron M. Medlin. All rights reserved.