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The distributive effect of monetary policy: The top one percent makes the difference

Karen Davtyan

Economic Modelling, 2017, vol. 65, issue C, 106-118

Abstract: The paper evaluates the distributional effect of monetary policy. The empirical analysis is implemented for the USA, where the dynamics in income inequality is mainly driven by the variation in the top one percent of the income distribution. The paper uses the inequality measures that represent the whole income distribution. The distributive effect of monetary policy is evaluated in the cases of different frequency data. To identify a monetary policy shock, the paper applies the contemporaneous and the long run identification methods. In particular, a cointegration relation is determined among the considered variables and the vector error correction methodology is used for the identification. The obtained results indicate that contractionary monetary policy decreases income inequality. These results can have important implications for the design of policies to reduce income inequality by giving more weight to monetary policy.

Keywords: Income inequality; Monetary policy; Cointegration; Identification (search for similar items in EconPapers)
JEL-codes: C32 D31 E52 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.econmod.2017.05.011

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