Unconventional Monetary Policy and Income Inequality in the U.S.

Anniken Ekås & Annelinn Hjelle

Student thesis: Master thesis


When the zero lower bound became binding in the United States in 2008, the Federal Reserve implemented a range of unprecedented monetary policy instruments to revive the economy. The side effects of these new policy tools are consequently unknown territory, which has raised widening concern that unconventional monetary policy has contributed to exacerbated economic inequality. The purpose of this thesis is to discuss and analyze the distributive income effects of unconventional monetary policy in the United States. In order to address the distributional consequences of the policy further, we estimate a vector autoregressive model for the period between the end of 2008 and 2015. This thesis focus on indicators of the stock and labor market as channels in which monetary policy might affect the income gap. To identify unconventional monetary policy shocks, we apply a shadow rate for the Federal Reserve rate. The income inequality is measured with the Gini coefficient and 90/10 ratio, which are calculated using data from the Consumer Expenditure Survey. Our results indicate that i) unconventional monetary shocks contributes to an increasing disparity between income groups. In particular, we provide evidence that the Gini coefficient and the 90/10 ratio rise significantly following a negative shock to the Shadow Federal Funds rate. Households at the different ends of the income distribution respond heterogeneously to monetary policy shocks. Further, our empirical results indicate that ii) the stock market is likely to have an augmented effect on the widening gap. We also find evidence that iii) the employment-to-population ratio rises following a negative shock to the Shadow rate and argue the labor market to be a stabilizing factor during such a policy regime, by compressing the income gap. iv) Finally, our findings suggest that unconventional monetary policy shocks explain a larger share of the changes in the income distribution than monetary policy during conventional periods.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages109