The Unassuming Economist

From a paper by Fabio Anobile, Marco Maria Matarrese, Alberto Costantiello, and Lucio Laureti:

“Income inequality poses significant challenges to economic development, social stability, and sustainable growth. While some studies argue that expansionary monetary policies exacerbate inequality by benefiting financial asset holders, others suggest they reduce inequality through job creation and economic stimulation. This study investigates the relationship between monetary policy and inequality, focusing on both conventional (federal funds rate) and unconventional (shadow rate) measures. Given the limitations of traditional interest rate indicators, the shadow rate offers a more comprehensive assessment of monetary policy effects, particularly in zero-lower-bound conditions. Employing a structural vector autoregression (SVAR) model with Cholesky decomposition, this research analyses the short-run effects of monetary policy on inequality. The findings highlight that the shadow rate provides a more accurate representation of monetary policy’s impact on inequality compared to conventional measures, emphasizing the need for refined analytical tools in economic policy analysis. Policymakers should update models to reflect evolving transmission mechanisms, ensuring more accurate assessments and effective decisions.”