Macroeconomic shocks and income inequality: An empirical investigation on the distributional channels of monetary policy and oil price news shocks

Abstract

This thesis provides a deeper insight into the connection between macroeconomic shocks and income inequality across various economies. Through empirical analysis of the distributional channels of propagation, the study reveals that macroeconomic shocks, such as monetary policy and oil price news, impact the income distribution asymmetrically. This observation is consistent across both economies studied, the US and the UK. Particularly, a contractionary monetary policy shock in the UK is found to produce an increase in inequality through the earnings heterogeneity and income composition channel. While low-income households are mainly left unaffected due to their high exposure to social benefits, high-income households race away because of the higher proportion of capital income components. These asymmetric effects also exist in the US, an economy investigated by looking at the time-varying effects of a contractionary monetary policy shock. In line with previous findings in the UK, the study finds that the same channels are in place. However, by adding another layer of complexity to the model, the study shows that the US income distribution became more responsive to monetary contractions in the more recent periods of the sample. This is mainly rooted in the dominant effects of the capital income components leading to a stronger effect of the income composition channel. Finally, the thesis examines a different macroeconomic shock: oil price news shocks. When including all deciles of the income distribution in the modelling approach the asymmetric effects of these shocks again are detected. The overall picture i.e. capital income components make up a significant part of rich households and hence, are the main drivers for the different reactions of this group, is confirmed.