Quality & Quantity

, Volume 53, Issue 1, pp 283–295 | Cite as

The effectiveness of monetary and fiscal policy shocks on U.S. inequality: the role of uncertainty

  • Goodness C. AyeEmail author
  • Matthew W. Clance
  • Rangan Gupta


The study examines the effect of monetary and fiscal policy on inequality conditioned on low and high uncertainty. We use U.S. quarterly time series data on different measures of income, labour earnings, consumption and total expenditure inequality as well as economic uncertainty. Our analysis is based on the impulse responses from the local projection methods that enable us to recover a smoothed average of the underlying impulse response functions. The results show that both contractionary monetary and fiscal policies increase inequality, and in the presence of relatively higher levels of uncertainty, the effectiveness of both policies is weakened. Thus, pointing to the need for policy-makers to be aware of the level of uncertainty while conducting economic policies in the U.S.


Inequality Monetary and fiscal policies Uncertainty 

JEL Classification

C22 E24 E40 E62 


  1. Aastveit, K.A., Natvik, G.J., Sola, S.: Economic uncertainty and the influence of monetary policy. J. Int. Money Finance 76, 50–67 (2017)CrossRefGoogle Scholar
  2. Afonso, A., Schuknecht, L., Tanzi, V.: Income distribution and public spending: an efficiency assessment. J. Econ. Inequal. 8, 367–389 (2010)CrossRefGoogle Scholar
  3. Albanesi, S.: Inflation and inequality. J. Monetary Econ. 54(4), 1088–1114 (2007)CrossRefGoogle Scholar
  4. Azzimonti, M.: Partisan conflict and private investment. J. Monetary Econ. 93(1), 114–131 (2018)CrossRefGoogle Scholar
  5. Bachmann, R., Elstner, S., Sims, E.R.: Uncertainty and economic activity: evidence from business survey data. Am. Econ. J. Macroecon. 5(2), 217–249 (2013)CrossRefGoogle Scholar
  6. Baker, S.R., Bloom, N., Davis, S.J.: Measuring economic policy uncertainty. Q. J. Econ. 131(4), 1593–1636 (2016)CrossRefGoogle Scholar
  7. Balcilar, M., Demirer, R., Gupta, R., van Eyden, R.: The impact of US policy uncertainty on the monetary effectiveness in the Euro area. J. Policy Model. 39(6), 1052–1064 (2017)CrossRefGoogle Scholar
  8. Basu, S., Bundick, B.: Uncertainty shocks in a model of effective demand. Econometrica 85(3), 937–958 (2017)CrossRefGoogle Scholar
  9. Bernanke, B.S.: Irreversibility, uncertainty, and cyclical investment. Q. J. Econ. 98(1), 85–106 (1983)CrossRefGoogle Scholar
  10. Bernanke, B.S.: Monetary policy and inequality. Ben Bernanke’s Blog, 1 June 2015 (2015)Google Scholar
  11. Bloom, N.: The impact of uncertainty shocks. Econometrica 77(3), 623–685 (2009)CrossRefGoogle Scholar
  12. Bloom, N.: Fluctuations in uncertainty. J. Econ. Perspect. 28(2), 153–176 (2014)CrossRefGoogle Scholar
  13. Bloom, N., Bond, S., Reenen, J.V.: Uncertainty and investment dynamics. Rev. Econ. Stud. 74(2), 391–415 (2007)CrossRefGoogle Scholar
  14. Bullard, J.: Income inequality and monetary policy: a framework with answers to three questions. In: Speech at C. Peter McColough Series on International Economics, Council on Foreign Relations, 26 June 2014 (2014)Google Scholar
  15. Carpenter, S.B., Rodgers, W.M.: The disparate labor market impacts of monetary policy. J. Policy Anal. Manag. 23(4), 813–830 (2004)CrossRefGoogle Scholar
  16. Castelnuovo, E., Pellegrino, G.: Uncertainty-dependent effects of monetary policy shocks: a new Keynesian interpretation. (2017)
  17. Coibion, O., Gorodnichenko, Y., Kueng, L., Silvia, J.: Innocent bystanders? Monetary policy and inequality in the U.S.? J. Monetary Econ. 88, 70–89 (2017)CrossRefGoogle Scholar
  18. Davtyan, K.: The distributive effect of monetary policy: the top one percent makes the difference. Econ. Model. 65, 106–118 (2017)CrossRefGoogle Scholar
  19. Dixit, A., Pindyck, R.: Investment Under Uncertainty. Princeton University Press, Princeton (1994)Google Scholar
  20. Doepke, M., Schneider, M.: Inflation and the redistribution of nominal wealth. J. Polit. Econ. 114(6), 1069–1097 (2006)CrossRefGoogle Scholar
  21. Doerrenberg, P., Peichl, A.: The impact of redistributive policies on inequality in OECD countries. Appl. Econ. 46(17), 2066–2086 (2014)CrossRefGoogle Scholar
  22. Erosa, A., Ventura, G.: On inflation as a regressive consumption tax. J. Monetary Econ. 49(4), 761–795 (2002)CrossRefGoogle Scholar
  23. Fernández-Villaverde, J., GuerrónQuintana, P., Rubio-Ramirez, J.F., Uribe, M.: Risk matters: the real effects of volatility shocks. Am. Econ. Rev. 101(6), 2530–2561 (2011)CrossRefGoogle Scholar
  24. Fernández-Villaverde, J., Guerrón-Quintana, P.A., Kuester, K., Rubio-Ramírez, J.: Fiscal volatility shocks and economic activity. Am. Econ. Rev. 105(11), 352–3384 (2015)CrossRefGoogle Scholar
  25. Forbes, K. (2015): Low interest rates: King Midas’ golden touch?. In: Speech at the Institute of Economic Affairs, 24 Feb 2015Google Scholar
  26. Frank, M.W.: Inequality and growth in the United States: evidence from a new state-level panel of income inequality measure. Econ. Inq. 47(1), 55–68 (2009)CrossRefGoogle Scholar
  27. Frank, M.W.: A new state-level panel of annual inequality measures over the period 1916–2005. J. Bus. Strateg. 31(1), 241–263 (2014)Google Scholar
  28. Heathcote, J., Perri, F., Violante, G.L.: Unequal we stand: an empirical analysis of economic inequality in the U.S., 1967–2006. Rev. Econ. Dyn. 13(1), 15–51 (2010)CrossRefGoogle Scholar
  29. Husted, L., Rogers, J., Sun, B. (2017): Measuring monetary policy uncertainty: the federal reserve, January 1985–January 2016. International Finance Discussion Papers, Board of Governors of the Federal Reserve System, Number 1215Google Scholar
  30. Istrefi, K., Mouabbi, S.: Subjective interest rate uncertainty and the macroeconomy: a cross-country analysis. J. Int. Money Finance (2017).
  31. Jordà, Ò.: Estimation and inference of impulse responses by local projections. Am. Econ. Rev. 95(1), 161–182 (2005)CrossRefGoogle Scholar
  32. Jurado, K., Ludvigson, S.C., Ng, S.: Measuring uncertainty. Am. Econ. Rev. 105(3), 1177–1216 (2015)CrossRefGoogle Scholar
  33. Ledoit, O.: The redistributive effects of monetary policy. Manuscript. (2009)
  34. Mersch, Y.: Monetary policy and economic inequality. In: Keynote Speech, Corporate Credit Conference, 17 Oct 2014 (2014)Google Scholar
  35. Mumtaz, H., Theophilopoulou, A.: The impact of monetary policy on inequality in the UK. An empirical analysis. Eur. Econ. Rev. 98, 410–423 (2017)CrossRefGoogle Scholar
  36. Nakajima, M.: The redistributive consequences of monetary policy. Federal Reserve Bank of Philadelphia Research Department, Business Review, Second Quarter, pp. 9–16 (2015)Google Scholar
  37. O’Farrell, R., Rawdanowicz, L.: Monetary policy and inequality: financial channels. Int. Finance 20, 174–188 (2017)CrossRefGoogle Scholar
  38. Ocakverdi, E.: Impulse responses by local projections. Econometric Analysis Insight Blog, Thursday, 23 June 2016 (2016)Google Scholar
  39. Organization for Economic Cooperation and Development (OECD): In it Together: Why Less Inequality Benefits All. OECD Publishing, Paris (2015)Google Scholar
  40. Ozturk, E.O., Sheng, X.S.: Measuring global and country-specific uncertainty. J. Int. Money Finance. (2017). Google Scholar
  41. Pierdzioch, C., Gupta, R.: Uncertainty and forecasts of U.S. recessions. University of Pretoria, Department of Economics, Working Paper No. 2017-32 (2017)Google Scholar
  42. Romer, C.D., Romer, D.H.: A new measure of monetary shocks: derivation and implications. Am. Econ. Rev. 94(4), 1055–1084 (2004)CrossRefGoogle Scholar
  43. Romer, C.D., Romer, D.H.: The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks. Am. Econ. Rev. 100(3), 763–801 (2010)CrossRefGoogle Scholar
  44. Saiki, A., Frost, J.: How does unconventional monetary policy affect inequality? Evidence from Japan. DNB Working Paper 423 (2014)Google Scholar
  45. Tenreyro, S., Thwaites, G.: Pushing on a string: U.S. monetary policy is less powerful in recessions. Am. Econ. J. Macroecon. 8(4), 43–74 (2016)CrossRefGoogle Scholar
  46. Teulings, C.N., Zubanov, N.: Is economic recovery a myth? Robust estimation of impulse responses. J. Appl. Econom. 29, 497–514 (2014)CrossRefGoogle Scholar
  47. Vavra, J.: Inflation dynamics and time-varying volatility: new evidence and an ss interpretation. Q. J. Econ. 129(1), 215–258 (2014)CrossRefGoogle Scholar
  48. Villarreal, F.: Monetary policy and inequality in Mexico, MPRA Paper 57074 (2014)Google Scholar
  49. Williamson, S.D.: Monetary policy and distribution. J. Monetary Econ. 55(6), 1038–1053 (2009)CrossRefGoogle Scholar
  50. Wolff, E., Zacharias, A.: The distributional consequences of government spending and taxation in the U.S., 1989 and 2000. Rev. Income Wealth 53(4), 692–715 (2007)CrossRefGoogle Scholar
  51. Wu, J.C., Xia, F.D.: Measuring the macroeconomic impact of monetary policy at the zero lower bound. J. Money Credit Bank. 48(2–3), 253–291 (2016)CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media B.V., part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of PretoriaPretoriaSouth Africa

Personalised recommendations