Working Paper: CEPR ID: DP17049
Authors: Minsu Chang; Frank Schorfheide
Abstract: In this paper we use the functional vector autoregression (VAR) framework of Chang, Chen, and Schorfheide (2021) to study the effects of monetary policy shocks (conventional and informational) on the cross-sectional distribution of earnings and consumption. We find that an expansionary monetary policy shock reduces earnings inequality. The reduction is generated by what we call the employment channel. In the left tail of the earnings distribution, the expansion lifts individuals out of unemployment and thereby reduces the earnings dispersion. For consumption we obtain the opposite result: the expansionary policy shock raises the mass in the right tail of the consumption distribution, thereby increasing consumption inequality.
Keywords: consumption distribution; earnings distribution; functional vector autoregressions; heterogeneous agent models; monetary policy shocks
JEL Codes: C11; C32; C52; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unemployment (J64) | reduces earnings inequality (D31) |
| higher income (D31) | increases consumption inequality (F62) |
| expansionary monetary policy shock (E49) | reduces earnings inequality (D31) |
| expansionary monetary policy shock (E49) | increases consumption inequality (F62) |