The Unassuming Economist

From a paper by Pradyumna Dash, Ankit Kumar, and Chetan Subramanian:

“This study investigates the effects of U.S. monetary policy on income inequality in open economies from 1970 to 2016. We find that a 100-basis-point increase in the federal funds rate leads to a cumulative reduction of about 0.15% in income inequality over three years. Interestingly, we show that the effect of US monetary policy on inequality varies over time. The impact also varies by exchange rate regime: in flexible regimes, the reduction can reach nearly 0.3%, while in pegged regimes, it diminishes to around 0.13%. This impact in pegged regimes is influenced by wage rigidity and labor market regulations in the economy. To explain these results, we develop a two-agent small open economy model that incorporates rigid wages, highlighting the link between monetary policy and inequality dynamics.”