Monetary Policy and the Top 10%: A Time-Series Analysis Using ARDL and ECM

Omar Nadeen () and Richter Christian ()
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Omar Nadeen: German University in Cairo, Cairo, Egypt
Richter Christian: Business School, The Knowledge Hub – Coventry University, Cairo, Egypt

Statistics, Politics and Policy, 2021, vol. 12, issue 2, 359-374

Abstract: For the past decades, income inequality has been on the rise, and so is the frequency of its mentions in recent speeches by central bankers. With the heightened importance of the topic, this research aims to study the impact of monetary policy on income inequality. The study used dynamic models for the analysis, namely; the Error-correction Model (ECM) and the Auto-regressive Distributed Lag (ARDL) model to determine the relationship in both the short- and long-run. The data used were the top 10% income share and the short-term interest rate. Our main hypothesis is that changes in the short-term interest rate have a significant impact on the top 10% income share. We draw time-series evidence from a sample of nine economies at different stages of development: United States, United Kingdom, Russia, Germany, France, Greece, China, South Africa and Chile. The findings support the hypothesis with interestingly varying effects across our sample. These results provide important implications that can contribute in bettering policy setting and add to the discussion of the role of central banks in reducing income inequality.

Keywords: auto-regressive distributed lag model; monetary policy; engle-granger approach; error correction model; income inequality (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/spp-2021-0019

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