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The transmission of uncertainty shocks on income inequality: State-level evidence from the United States

Manfred Fischer, Florian Huber and Michael Pfarrhofer ()

No 2018-4, Working Papers in Economics from University of Salzburg

Abstract: In this paper, we explore the relationship between state-level household income inequality and macroeconomic uncertainty in the United States. Using a novel large-scale macroeconometric model, we shed light on regional disparities of inequality responses to a national uncertainty shock. The results suggest that income inequality decreases in most states, with a pronounced degree of heterogeneity in terms of shapes and magnitudes of the dynamic responses. By contrast, some few states, mostly located in the West and South census region, display increasing levels of income inequality over time. We find that this directional pattern in responses is mainly driven by the income composition and labor market fundamentals. In addition, forecast error variance decompositions allow for a quantitative assessment of the importance of uncertainty shocks in explaining income inequality. The findings highlight that volatility shocks account for a considerable fraction of forecast error variance for most states considered. Finally, a regression-based analysis sheds light on the driving forces behind differences in state-specific inequality responses.

Keywords: income distribution; inequality; uncertainty shocks; US states; global vector autoregressive model (search for similar items in EconPapers)
JEL-codes: C11 C30 D31 E39 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2018-11-01, Revised 2019-01-10
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Working Paper: The transmission of uncertainty shocks on income inequality: State-level evidence from the United States (2018) Downloads
Working Paper: The transmission of uncertainty shocks on income inequality: State-level evidence from the United States (2018) Downloads
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