Monetary Policy and the Dynamics of Wealth Inequality

Abstract

I provide new evidence that monetary policy plays a significant role in driving persistent wealth inequality in the United States. Using local projections with the Distributional Financial Accounts and high-frequency identification, I find that contractionary monetary policy disproportionately reduces the net worth of the bottom 50% of households by wealth. Heterogeneous portfolios explain the disparity of responses: the top 1% of households suffer from reduced equity prices while the bottom 50% suffer from leveraged house price declines. I show that monetary contractions generate larger net worth responses than monetary easings of similar magnitude, driving persistent wealth gaps.

Ethan Feilich

Economist

Economist in the Office of Economic Policy at the U.S. Department of the Treasury