Quantitative Easing Policy and Income Inequality in the U.S. Economy: Evidence from a FAVAR Model

Abstract

The aim of this paper is to analyze the impact of monetary base shocks on different measures of inequality in the U.S. economy for the periods before and after the implementation of the quantitative easing (QE) policy. In order to take additional information into account, the Factor-Augmented Vector Autoregressive (FAVAR) model is built and used in estimation. To extract the component factors, the Principal Component Analysis (PCA) method is applied on data of 115 series of monthly data in the U.S. economy for the period of January 1997 to September 2018. The Impulse Response Function (IRFs) results of FAVAR models show that the expansionary monetary policy does not affect different measures of inequality for the periods before and after QE policy implementation in the short run, but there is a long-run relationship between them for the two periods. The results also show that there are no signs of a “price puzzle” nor “liquidity puzzle” or “exchange rate puzzle” for the period after QE policy implementation.