Federal Reserve Monetary Policy and Wealth Inequality: An instrumental-variable local projections approach (2023) (Job Market Paper)
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.
Federal Reserve Anti-Inflation Policy: Wealth Protection for the 1%? (2022)
Joint with Gerald Epstein
Joint with Gerald Epstein
The Federal Reserve has a dual mandate from Congress that directs it to conduct monetary policy as such to achieve “maximum employment” and “stable prices.” Yet the U.S. central bank typically chooses to address inflation as a top priority and focuses on employment only secondarily, if at all. Why? In this paper we argue that an important reason is that the Federal Reserve conducts policy so as protect the real wealth of the top 1% of the wealth distribution. We focus on the Fed’s fight against inflation in 2021-2022, when it rapidly raised its policy interest rates by almost 4 percentage points in the face of more than 6 percent inflation. Using a novel econometric analysis, we provide evidence that shows that this policy serves as a real net wealth protection policy for the 1% by restoring some of the lost wealth that they would otherwise lose due to unexpected inflation. The results of this policy for the top 10% of the wealth distribution are econometrically ambiguous. But to the extent that the Fed’s high interest rates generate higher unemployment or even a recession, this wealth protection for the 1% could have serious income costs for workers who find themselves or another member of their household out of a job.
Link here to paper, available on the PERI website.
Money, Credit, and Financial Crises by International Monetary Regime: An Extension of Schularick & Taylor (2019)
Schularick and Taylor (ST) (2012) address a debate in the literature over whether broad money aggregates versus credit aggregates explain financial crises. Analyzing econometrically an impressive data set of financial crises and monetary and credit indicators spanning 14 countries between 1870 and 2008, their results provide support for lagged credit growth as the better predictor of financial crises relative to broad money. This paper provides two modest extensions: First, while the original analysis split the data across two major eras, pre- and post-WWII, ST’s data set encompasses the four major international monetary regimes in modern history—the gold standard (1870-1913), the interwar period (1920-1938), the Bretton Woods system (1948-1971), and post-Bretton Woods (or neoliberal) era (1972-2008)—for which I break down the time series to test if their results hold across each regime using their same methodology. Second, while ST use bank loans as their private sector credit indicator, credit aggregates in the neoliberal period encompass a greater proportion of tradable securities assets for which we have new data compiled by the IMF’s Global Debt Database (GDD). The GDD also provides disaggregated private sector time series for businesses and households. I test whether these indicators improve the predictive capacity of the original authors’ baseline model. In the first case, I find their results hold, credit aggregates still perform better. In the second, the updated credit aggregates which include debt securities as well as loans improve the baseline model prediction. I also find that household debt-to-GDP growth increases the likelihood of a crisis relative to the business sector.
Isolating The Consumption Effect Of Immigration On Firm Expansion At The Extensive Margin (2017)
Joint with Gihoon Hong
Joint with Gihoon Hong
This paper investigates how local firms respond to immigrant consumption at the extensive margin. We use an innovative approach to isolate the consumption channel by using on non-labor force participating immigrants inflows from the American Community Surveys from 2002 to 2011. As would be expected, we find that non-labor force participating immigrant inflows are highly correlated with establishment entry level and negatively associated with exits.
© 2023 Aaron M. Medlin. All rights reserved.