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Presentation at the Banque de France by Oliivier Coibion and John Silvia
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Monetary Policy and Inequality in the U.S.
Olivier Coibion
College of William and Mary
Yuriy Gorodnichenko
UC Berkeley
John Sivia
Wells Fargo
Global Interdependence Center
March 2012
Standard Explanations for Rising U.S. Income Inequality:
1. Skill-biased technical change
2. Trade globalization
3. Institutional changes, e.g. declining unionization,
deregulation/growth of financial sector
25%
30%
35%
40%
45%
50%
1917
1922
1927
1932
1937
1942
1947
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
To
p 1
0%
In
co
me S
hare
Including capital gains
Channels from Monetary Policy to Consumption/Income Inequality
• Heterogeneous wage/employment effects across population:
a) different complementarities with capital for skilled/unskilled
b) different industry sensitivity to interest rate changes (e.g. durables vs.
nondurables, cost channels and liquidity constraints)
c) insiders vs. outsiders in the firms (e.g. seniority)
Channels from Monetary Policy to Consumption/Income Inequality
• Heterogeneous wage/employment effects across population:
a) different complementarities with capital for skilled/unskilled
b) different industry sensitivity to interest rate changes (e.g. durables vs.
nondurables, cost channels and liquidity constraints)
c) insiders vs. outsiders in the firms (e.g. seniority)
• Income/consumption composition effects:
a) importance of labor earnings vs. financial income vs. business income vs.
transfers
b) importance of durable goods purchases and other interest-sensitive expenditures
Channels from Monetary Policy to Consumption/Income Inequality
• Heterogeneous wage/employment effects across population:
a) different complementarities with capital for skilled/unskilled
b) different industry sensitivity to interest rate changes (e.g. durables vs.
nondurables, cost channels and liquidity constraints)
c) insiders vs. outsiders in the firms (e.g. seniority)
• Income/consumption composition effects:
a) importance of labor earnings vs. financial income vs. business income vs.
transfers
b) importance of durable goods purchases and other interest-sensitive expenditures
• Wealth effects on consumption and labor supply decisions:
a) real interest rate increase is a transfer from borrowers to savers
b) different portfolio allocations will also affect wealth outcomes
Channels from Monetary Policy to Consumption/Income Inequality
• Heterogeneous wage/employment effects across population:
a) different complementarities with capital for skilled/unskilled
b) different industry sensitivity to interest rate changes (e.g. durables vs.
nondurables, cost channels and liquidity constraints)
c) insiders vs. outsiders in the firms (e.g. seniority)
• Income/consumption composition effects:
a) importance of labor earnings vs. financial income vs. business income vs.
transfers
b) importance of durable goods purchases and other interest-sensitive expenditures
• Wealth effects on consumption and labor supply decisions:
a) real interest rate increase is a transfer from borrowers to savers
b) different portfolio allocations will also affect wealth outcomes
We want to assess the empirical importance of these channels.
Do monetary policy changes meaningfully affect income/consumption inequality?
How we do this:
• Step 1: Identify “Unusual” Changes in Monetary Policy as suggested by Christina
and David Romer
Fed Funds changes that deviate from “usual” behavior
1980 1985 1990 1995 2000 2005
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
How we do this:
• Step 2: Measure income and consumption inequality across households in the
United States over time using the Survey of Consumer Expenditures
Household Labor Earnings
How we do this:
• Step 2: Measure income and consumption inequality across households in the
United States over time using the Survey of Consumer Expenditures
Household Total Income = Household Labor Earnings
+ Household Business Income
+ Household Financial Income (bonds, dividends)
+ “Other” Household Income
(Soc. Sec., UE benefits, alimony, pensions, welfare, etc…)
How we do this:
• Step 2: Measure income and consumption inequality across households in the
United States over time using the Survey of Consumer Expenditures
Household Total Income = Household Labor Earnings
+ Household Business Income
+ Household Financial Income (bonds, dividends)
+ “Other” Household Income
(Soc. Sec., UE benefits, alimony, pensions, welfare, etc…)
Household Consumption = Purchases of Non-Durables and Services
+ Purchases of Durables (furniture, TV’s, etc…)
How we do this:
• Step 2: Measure income and consumption inequality across households in the
United States over time using the Survey of Consumer Expenditures
Household Total Income = Household Labor Earnings
+ Household Business Income
+ Household Financial Income (bonds, dividends)
+ “Other” Household Income
(Soc. Sec., UE benefits, alimony, pensions, welfare, etc…)
Household Consumption = Purchases of Non-Durables and Services
+ Purchases of Durables (furniture, TV’s, etc…)
Household Expenditures = Household Consumption
+ Mortgage Payments (if any)
+ Auto Purchases (if any)
+ Other Expenditures (education, medical, house expenses, …)
How we do this:
• Step 2: Measure income and consumption inequality across households in the
United States over time using the Survey of Consumer Expenditures
This distribution of households does NOT include the 1%.
Gin
i C
oeff
icie
nt
1985 1990 1995 2000 20050.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
0.46
0.48
0.5
Recessions Income Earnings Expenditures Consumption
How we do this:
• Step 3: Determine what happens to income and consumption along different parts of
the distribution after monetary policy shocks.
The Effects of Monetary Policy Shocks by Percentile
Monetary policy affects labor earnings differently across the distribution.
2 4 6 8 10 12 14 16 18 20-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06Income Inequality
2 4 6 8 10 12 14 16 18 20-0.1
-0.05
0
0.05
0.1Earnings Inequality
2 4 6 8 10 12 14 16 18 20-0.1
-0.05
0
0.05
0.1
0.15Expenditure Inequality
2 4 6 8 10 12 14 16 18 20-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08Consumption Inequality
P10
P25
P50
P75
P90
The Effects of Monetary Policy Shocks by Percentile
Effects on consumption across the distribution are very similar.
2 4 6 8 10 12 14 16 18 20-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06Income Inequality
2 4 6 8 10 12 14 16 18 20-0.1
-0.05
0
0.05
0.1Earnings Inequality
2 4 6 8 10 12 14 16 18 20-0.1
-0.05
0
0.05
0.1
0.15Expenditure Inequality
2 4 6 8 10 12 14 16 18 20-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08Consumption Inequality
P10
P25
P50
P75
P90
The Effects of Monetary Policy Shocks by Percentile
Effects on total income are smaller for 10th, 25th percentiles, similar for 50th and above.
2 4 6 8 10 12 14 16 18 20-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06Income Inequality
2 4 6 8 10 12 14 16 18 20-0.1
-0.05
0
0.05
0.1Earnings Inequality
2 4 6 8 10 12 14 16 18 20-0.1
-0.05
0
0.05
0.1
0.15Expenditure Inequality
2 4 6 8 10 12 14 16 18 20-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08Consumption Inequality
P10
P25
P50
P75
P90
Why does income at low percentiles decline by less than earnings?
Quintiles by
consumption of
nondurables and
services
Share of income source Ratio of mean consumption of
nondurables and services to mean
consumption of nondurables and
services in the 3rd
quintile
Labor
Earnings Business Financial Other
(1) (2) (3) (4) (5)
Panel A: 1980s
1
2
3
4
5
Panel B: 1990s
1
2
3
4
5
Panel C: 2000s
1
2
3
4
5
Why does income at low percentiles decline by less than earnings?
Quintiles by
consumption of
nondurables and
services
Share of income source Ratio of mean consumption of
nondurables and services to mean
consumption of nondurables and
services in the 3rd
quintile
Labor
Earnings Business Financial Other
(1) (2) (3) (4) (5)
Panel A: 1980s
1 0.352 0.022 0.112 0.515 0.42
2 0.588 0.040 0.112 0.260 0.73
3 0.694 0.057 0.096 0.153 1.00
4 0.762 0.059 0.081 0.098 1.34
5 0.767 0.088 0.078 0.067 2.18
Panel B: 1990s
1 0.380 0.020 0.106 0.494 0.43
2 0.597 0.040 0.097 0.267 0.73
3 0.704 0.050 0.086 0.160 1.00
4 0.770 0.056 0.071 0.103 1.35
5 0.773 0.082 0.076 0.069 2.27
Panel C: 2000s
1 0.435 0.019 0.086 0.460 0.43
2 0.653 0.029 0.085 0.234 0.73
3 0.740 0.037 0.072 0.151 1.00
4 0.801 0.042 0.065 0.092 1.36
5 0.812 0.051 0.071 0.065 2.32
Government transfers dampen the effects of shocks on low-income households.
The Effects of Monetary Policy Shocks by Percentile
Effects on expenditures are similar to consumption, but display disproportionately
large increases in expenditures for those at the high-end of the distribution.
2 4 6 8 10 12 14 16 18 20-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06Income Inequality
2 4 6 8 10 12 14 16 18 20-0.1
-0.05
0
0.05
0.1Earnings Inequality
2 4 6 8 10 12 14 16 18 20-0.1
-0.05
0
0.05
0.1
0.15Expenditure Inequality
2 4 6 8 10 12 14 16 18 20-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08Consumption Inequality
P10
P25
P50
P75
P90
Why do expenditures at high percentiles rise so much?
Quintiles by
consumption of
nondurables
and services
Shares in consumption
Selected shares in total spending Ratio of total
spending to
consumption of
nondurables and
services
Nondurables Durables Services
Interest
sensitive
expenditures
Mortgage
payments
Purchases
of new
vehicles
(1) (2) (3)
(4) (5) (6) (7)
Panel B: 1990s
1
2
3
4
5
Why do expenditures at high percentiles rise so much?
Quintiles by
consumption of
nondurables
and services
Shares in consumption
Selected shares in total spending Ratio of total
spending to
consumption of
nondurables and
services
Nondurables Durables Services
Interest
sensitive
expenditures
Mortgage
payments
Purchases
of new
vehicles
(1) (2) (3)
(4) (5) (6) (7)
Panel B: 1990s
1 0.655 0.059 0.285
0.113 0.021 0.015 2.13
2 0.637 0.084 0.279
0.175 0.050 0.034 2.08
3 0.631 0.096 0.273
0.215 0.074 0.040 2.03
4 0.613 0.109 0.278
0.246 0.094 0.046 2.02
5 0.567 0.116 0.317
0.267 0.100 0.051 1.91
There is no dramatic difference in the allocation of consumption or expenditures for those
at the upper end of the distribution relative to previous quintiles.
Why do expenditures at high percentiles rise so much?
Redistributive wealth effects: do we see differential response in expenditures of savers
relative to borrowers?
Why do expenditures at high percentiles rise so much?
There is no important difference in long-run total income across groups but…
5 10 15-0.3
-0.2
-0.1
0
0.1
0.2Total income
5 10 15-0.6
-0.4
-0.2
0
0.2
0.4Earnings
5 10 15-0.2
-0.1
0
0.1
0.2Total expenditures
5 10 15-0.1
-0.05
0
0.05
0.1Consumption
CI Low net-worth High net-worth Everybody else
Why do expenditures at high percentiles rise so much?
High net-worth households have large increases in consumption and expenditures,
consistent with positive wealth effect of redistribution.
5 10 15-0.3
-0.2
-0.1
0
0.1
0.2Total income
5 10 15-0.6
-0.4
-0.2
0
0.2
0.4Earnings
5 10 15-0.2
-0.1
0
0.1
0.2Total expenditures
5 10 15-0.1
-0.05
0
0.05
0.1Consumption
CI Low net-worth High net-worth Everybody else
The contribution of “unusual” monetary policy to U.S. inequality
The contribution of “unusual” monetary policy to U.S. inequality
“Unusual” monetary policy actions helped reduce income and earnings inequality from
the mid-1990s to late 2000s.
Income Inequality
1985 1990 1995 2000 2005
-0.02
0
0.02
0.04
0.06
0.08
0.1
Earnings Inequality
1985 1990 1995 2000 2005
-0.05
0
0.05
0.1
Expenditure Inequality
1985 1990 1995 2000 2005
-0.04
-0.02
0
0.02
0.04
0.06
Consumption Inequality
1985 1990 1995 2000 2005
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
Recessions contribution of MP shocks actual
The contribution of “unusual” monetary policy to U.S. inequality
but contributed to cyclical fluctuations in consumption inequality.
Income Inequality
1985 1990 1995 2000 2005
-0.02
0
0.02
0.04
0.06
0.08
0.1
Earnings Inequality
1985 1990 1995 2000 2005
-0.05
0
0.05
0.1
Expenditure Inequality
1985 1990 1995 2000 2005
-0.04
-0.02
0
0.02
0.04
0.06
Consumption Inequality
1985 1990 1995 2000 2005
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
Recessions contribution of MP shocks actual
What about the Volcker disinflation?
What about the Volcker disinflation?
Volcker disinflation did not contribute much to income or earnings inequality…
Income Inequality
1985 1990 1995 2000 2005
-0.02
0
0.02
0.04
0.06
0.08
0.1
Earnings Inequality
1985 1990 1995 2000 2005
-0.05
0
0.05
0.1
Expenditure Inequality
1985 1990 1995 2000 2005
-0.04
-0.02
0
0.02
0.04
0.06
Consumption Inequality
1985 1990 1995 2000 2005
-0.02
0
0.02
0.04
What about the Volcker disinflation?
but likely contributed to the rising expenditure
and consumption inequality of the 1980s.
Income Inequality
1985 1990 1995 2000 2005
-0.02
0
0.02
0.04
0.06
0.08
0.1
Earnings Inequality
1985 1990 1995 2000 2005
-0.05
0
0.05
0.1
Expenditure Inequality
1985 1990 1995 2000 2005
-0.04
-0.02
0
0.02
0.04
0.06
Consumption Inequality
1985 1990 1995 2000 2005
-0.02
0
0.02
0.04
What about in recent years?
What about in recent years?
Source: San Francisco Fed
Since 2009, the Fed has been unable to lower interest rates the way it normally would
have: monetary policy has not been able to supply the typical expansionary impetus
for this stage of the business cycle.
-2
-1
0
1
2
3
4
5
6
7
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Actual FFR Predicted Values
FFR Target Range
What about in recent years?
Source: San Francisco Fed
Since 2009, the Fed has been unable to lower interest rates the way it normally would
have: monetary policy has not been able to supply the typical expansionary impetus
for this stage of the business cycle.
So income and consumption inequality are most likely higher than they would have been
had the Fed been able to respond in an unconstrained fashion.
-2
-1
0
1
2
3
4
5
6
7
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Actual FFR Predicted Values
FFR Target Range