Beyond borders, within societies: inequality and the global transmission of US monetary policy

Simone Arrigoni and Massimo Ferrari Minesso

No 3221, Working Paper Series from European Central Bank

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 87 countries over 1966-2020, we show that household heterogeneity influences how foreign GDP responds to a US monetary tightening. GDP contracts 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 this divergence is driven by differences in participation in international financial markets. Households in emerging markets face greater barriers to international investment, limiting their ability to re-balance portfolios towards higher-return foreign bonds after the shock. JEL Classification: D31, E21, E52, E58, F42

Keywords: income inequality; local projections; spillovers; state-dependence; US monetary policy (search for similar items in EconPapers)
Date: 2026-05
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263221

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