How Do Macroaggregates and Income Distribution Interact Dynamically? A Novel Structural Mixed Autoregression with Aggregate and Functional Variables

Yoosoon Chang (), Soyoung Kim and Joon Park ()
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Yoosoon Chang: Indiana University, Department of Economics
Joon Park: Indiana University, Department of Economics

CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: This paper investigates the interactions between macroeconomic aggregates and income distribution by developing a structural VAR model with functional variables. With this novel empirical approach, we are able to identify and analyze the effects of various shocks to theincome distribution on macro aggregates, as well as the effects of macroeconomic shocks on the income distribution. Our main findings are as follows: First, contractionary monetary policy shocks reduce income inequality when focusing solely on the redistributive effects, without considering the negative impact on aggregate income levels. This improvement is achieved by reducing the number of low and high-income families while increasing the proportion of middle-income families. However, when the aggregate income shift is also taken into account, contractionary monetary policy shocks worsen income inequality. Second, shocks to the incomedistribution have a substantial effect on output fluctuations. For example, income distribution shocks identified to maximize future output levels have a significant and persistent positive effect on output, contributing up to 30% at long horizons and over 50% for the lowest income percentiles. However, alternative income distribution shocks identified to minimize the futureGini index do not have any significant negative effects on output. This finding, combined with the positive effect of output-maximizing income distribution shocks on equality, suggests thatproperly designed redistributive policies are not subject to the often-claimed trade-off between growth and equality. Moreover, variations in income distribution are primarily explained byshocks to the income distribution itself, rather than by aggregate shocks, including monetary shocks. This highlights the need for redistributive policies to substantially alter the income distribution and reduce inequality.

Keywords: monetary policy; income distribution; re-distributive effects; structural vector autoregression; functional time series (search for similar items in EconPapers)
Pages: 74 pages
Date: 2025-01
New Economics Papers: this item is included in nep-cba
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https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2025-002.pdf (application/pdf)

Related works:
Working Paper: How Do Macroaggregates and Income Distribution Interact Dynamically? A Novel Structural Mixed Autoregression with Aggregate and Functional Variables (2025)
Working Paper: How Do Macroaggregates and Income Distribution Interact Dynamically? A Novel Structural Mixed Autoregression with Aggregate and Functional Variables (2025)
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