Beyond Borders, Within Societies: Inequality and the Global Transmission of US Monetary Policy

Simone Arrigoni and Massimo Ferrari

Working papers from Banque de France

Abstract: This paper provides novel evidence on how income inequality shapes the heterogeneity of US monetary policy spillovers to GDP across foreign economies. Using state-dependent local projections and exploiting variation in disposable income inequality across a panel of 87 countries over the period 1966-2020, we show that household heterogeneity influences how foreign GDP responds to a US monetary policy tightening. GDP contracts by up to one and a half times more when inequality is above average. However, while higher inequality amplifies negative spillovers in advanced economies, it mitigates them in emerging markets. To rationalise this finding, we use a three-country open economy Two-Agent New Keynesian (TANK) model, which suggests that this divergence is driven by differences in participation in international financial markets. Households in emerging market economies face greater barriers to international investment, limiting their ability to re-balance portfolios towards higher-return foreign bonds after the shock.

Keywords: US Monetary Policy; Spillovers; Income Inequality; Local Projections; State-Dependence (search for similar items in EconPapers)
JEL-codes: D31 E21 E52 E58 F42 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2026
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https://www.banque-france.fr/system/files/2026-05/WP1043.pdf

Related works:
Working Paper: Beyond borders, within societies: inequality and the global transmission of US monetary policy (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:1043

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