The Effect of Monetary Policy and other Macroeconomic Factors on Wealth Inequality in the United States

Abstract

Wealth inequality is a crescent phenomenon and topic that has been gaining attention of late, not least in the United States, but in many other countries as well. This Master’s thesis seeks to discern what factors have been conducive to this increase, chiefly focusing on the role played by the central bank via setting the federal funds rate and its effect on the top 1 percentile’s wealth share. To account for endogeneity between the variables we elected a Vector error correction model and additionally a VAR model, where the former also accounts for long run relationships in the case of cointegration. A decrease in the federal funds rate was found to be associated with an increase in the top 1 percentile’s wealth share in the long run. Likewise, in the long run an increase in the S&P 500 was associated with an increase in the top 1 percentile’s wealth share. The short run dynamics were fairly similar; the results obtained from the impulse response functions pertaining to the VAR model indicated a positive temporary response from the top 1 percentile’s wealth share subjected to a shock to the S&P 500, whereas inflation produced a transitory negative response. The results are in line with much of previous literature, though there is no absolute consensus as to all the results in the field at present.