DP 2024/4 - El-Shagi, M. / Yamarik, S.: The Effect of Monetary Policy Shocks on Income Inequality across US states

Makram El-ShagiSteven Yamarik

CFDS Discussion Paper 2024/4

Abstract

This paper examines the impact of Federal Reserve policy on income inequality across US states. We use the local projections method of Jorda to estimate impulse response functions for each state. We find that a restrictive monetary policy increases income inequality in almost all states, but with different magnitudes. Subsequent panel analysis examines the possible transmission mechanisms that can account for these differences. Our empirical results confirm the theoretical predictions - inequality is increased by higher inflation, home ownership, and earnings in the finance, insurance and real estate (FIRE) sector; but decreased by higher housing prices, unionization rates, educational attainment and minimum wage.

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