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
Top 10% Income Share
50% 45% 40% 35% 30%
Including capital gains 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
25%
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
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 1.4 1.2 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 1980
1985
1990
1995
2000
2005
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 0.5 0.48 0.46
Gini Coefficient
0.44 0.42 0.4 0.38 0.36 0.34 0.32 0.3
1985 Recessions
1990 Income
1995 Earnings
2000 Expenditures
2005 Consumption
This distribution of households does NOT include the 1%.
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 Income Inequality
Earnings Inequality
0.06
0.1
0.04 0.05
0.02 0
0 -0.02
P10 P25 P50 P75 P90
-0.04 -0.06 -0.08
2
4
6
8
10
12
14
16
18
-0.05
20
-0.1
2
4
6
Expenditure Inequality
8
10
12
14
16
18
20
16
18
20
Consumption Inequality
0.15
0.08 0.06
0.1
0.04 0.02
0.05
0 0
-0.02 -0.04
-0.05
-0.06 -0.1
2
4
6
8
10
12
14
16
18
20
-0.08
2
4
6
8
10
12
14
Monetary policy affects labor earnings differently across the distribution.
The Effects of Monetary Policy Shocks by Percentile Income Inequality
Earnings Inequality
0.06
0.1
0.04 0.05
0.02 0
0 -0.02
P10 P25 P50 P75 P90
-0.04 -0.06 -0.08
2
4
6
8
10
12
14
16
18
-0.05
20
-0.1
2
4
6
Expenditure Inequality
8
10
12
14
16
18
20
16
18
20
Consumption Inequality
0.15
0.08 0.06
0.1
0.04 0.02
0.05
0 0
-0.02 -0.04
-0.05
-0.06 -0.1
2
4
6
8
10
12
14
16
18
20
-0.08
2
4
6
8
10
12
14
Effects on consumption across the distribution are very similar.
The Effects of Monetary Policy Shocks by Percentile Income Inequality
Earnings Inequality
0.06
0.1
0.04 0.05
0.02 0
0 -0.02
P10 P25 P50 P75 P90
-0.04 -0.06 -0.08
2
4
6
8
10
12
14
16
18
-0.05
20
-0.1
2
4
6
Expenditure Inequality
8
10
12
14
16
18
20
16
18
20
Consumption Inequality
0.15
0.08 0.06
0.1
0.04 0.02
0.05
0 0
-0.02 -0.04
-0.05
-0.06 -0.1
2
4
6
8
10
12
14
16
18
20
-0.08
2
4
6
8
10
12
14
Effects on total income are smaller for 10th, 25th percentiles, similar for 50th and above.
Why does income at low percentiles decline by less than earnings? Quintiles by consumption of nondurables and services
Share of income source Labor Earnings
Business
Financial
Other
(1)
(2)
(3)
(4)
Panel A: 1980s 1 2 3 4 5 Panel B: 1990s 1 2 3 4 5 Panel C: 2000s 1 2 3 4 5
Ratio of mean consumption of nondurables and services to mean consumption of nondurables and services in the 3rd quintile (5)
Why does income at low percentiles decline by less than earnings? Quintiles by consumption of nondurables and services
1 2 3 4 5
1 2 3 4 5
1 2 3 4 5
Labor Earnings
Business
Financial
Other
(1)
(2)
(3)
(4)
Ratio of mean consumption of nondurables and services to mean consumption of nondurables and services in the 3rd quintile (5)
0.022 0.040 0.057 0.059 0.088
Panel A: 1980s 0.112 0.112 0.096 0.081 0.078
0.515 0.260 0.153 0.098 0.067
0.42 0.73 1.00 1.34 2.18
0.020 0.040 0.050 0.056 0.082
Panel B: 1990s 0.106 0.097 0.086 0.071 0.076
0.494 0.267 0.160 0.103 0.069
0.43 0.73 1.00 1.35 2.27
0.019 0.029 0.037 0.042 0.051
Panel C: 2000s 0.086 0.085 0.072 0.065 0.071
0.460 0.234 0.151 0.092 0.065
0.43 0.73 1.00 1.36 2.32
Share of income source
0.352 0.588 0.694 0.762 0.767
0.380 0.597 0.704 0.770 0.773
0.435 0.653 0.740 0.801 0.812
Government transfers dampen the effects of shocks on low-income households.
The Effects of Monetary Policy Shocks by Percentile Income Inequality
Earnings Inequality
0.06
0.1
0.04 0.05
0.02 0
0 -0.02
P10 P25 P50 P75 P90
-0.04 -0.06 -0.08
2
4
6
8
10
12
14
16
18
-0.05
20
-0.1
2
4
6
Expenditure Inequality
8
10
12
14
16
18
20
16
18
20
Consumption Inequality
0.15
0.08 0.06
0.1
0.04 0.02
0.05
0 0
-0.02 -0.04
-0.05
-0.06 -0.1
2
4
6
8
10
12
14
16
18
20
-0.08
2
4
6
8
10
12
14
Effects on expenditures are similar to consumption, but display disproportionately large increases in expenditures for those at the high-end of the distribution.
Why do expenditures at high percentiles rise so much? Shares in consumption Quintiles by consumption of Nondurables nondurables and services (1)
Selected shares in total spending
Durables
Services
Interest sensitive expenditures
(2)
(3)
(4) Panel B: 1990s
1 2 3 4 5
Mortgage payments
Purchases of new vehicles
(5)
(6)
Ratio of total spending to consumption of nondurables and services (7)
Why do expenditures at high percentiles rise so much? Shares in consumption Quintiles by consumption of Nondurables nondurables and services (1)
1 2 3 4 5
0.655 0.637 0.631 0.613 0.567
Selected shares in total spending
Durables
Services
Interest sensitive expenditures
(2)
(3)
(4)
0.059 0.084 0.096 0.109 0.116
0.285 0.279 0.273 0.278 0.317
Panel B: 1990s 0.113 0.175 0.215 0.246 0.267
Mortgage payments
Purchases of new vehicles
(5)
(6)
Ratio of total spending to consumption of nondurables and services (7)
0.021 0.050 0.074 0.094 0.100
0.015 0.034 0.040 0.046 0.051
2.13 2.08 2.03 2.02 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? Total income
Earnings
0.2
0.4
0.1
0.2
0
0
-0.1
-0.2
-0.2
-0.4
-0.3
5
10
-0.6
15
5
Total expenditures 0.1
0.1
0.05
0
0
-0.1
-0.05
5
10
-0.1
15 CI
15
Consumption
0.2
-0.2
10
Low net-worth
High net-worth
5
10 Everybody else
15
There is no important difference in long-run total income across groups but‌
Why do expenditures at high percentiles rise so much? Total income
Earnings
0.2
0.4
0.1
0.2
0
0
-0.1
-0.2
-0.2
-0.4
-0.3
5
10
-0.6
15
5
Total expenditures 0.1
0.1
0.05
0
0
-0.1
-0.05
5
10
-0.1
15 CI
15
Consumption
0.2
-0.2
10
Low net-worth
High net-worth
5
10 Everybody else
15
High net-worth households have large increases in consumption and expenditures, consistent with positive wealth effect of redistribution.
The contribution of “unusual� monetary policy to U.S. inequality
The contribution of “unusual” monetary policy to U.S. inequality Income Inequality
Earnings Inequality
0.1 0.1 0.08 0.06
0.05
0.04 0 0.02 -0.05
0 -0.02 1985
1990
1995
2000
2005
1985
Recessions
contribution of MP shocks
Expenditure Inequality
1990
1995
2000
2005
actual Consumption Inequality
0.06
0.03
0.04
0.02 0.01
0.02
0 0 -0.01 -0.02
-0.02
-0.04
-0.03 1985
1990
1995
2000
2005
1985
1990
1995
2000
2005
“Unusual” monetary policy actions helped reduce income and earnings inequality from the mid-1990s to late 2000s.
The contribution of “unusual� monetary policy to U.S. inequality Income Inequality
Earnings Inequality
0.1 0.1 0.08 0.06
0.05
0.04 0 0.02 -0.05
0 -0.02 1985
1990
1995
2000
2005
1985
Recessions
contribution of MP shocks
Expenditure Inequality
1990
1995
2000
2005
actual Consumption Inequality
0.06
0.03
0.04
0.02 0.01
0.02
0 0 -0.01 -0.02
-0.02
-0.04
-0.03 1985
1990
1995
2000
2005
1985
1990
1995
2000
2005
but contributed to cyclical fluctuations in consumption inequality.
What about the Volcker disinflation?
What about the Volcker disinflation? Income Inequality
Earnings Inequality
0.1 0.1
0.08 0.06
0.05
0.04 0 0.02 -0.05
0 -0.02 1985
1990
1995
2000
2005
1985
Expenditure Inequality
1990
1995
2000
2005
Consumption Inequality 0.04
0.06 0.04
0.02 0.02 0
0 -0.02
-0.02 -0.04 1985
1990
1995
2000
2005
1985
1990
1995
2000
2005
Volcker disinflation did not contribute much to income or earnings inequality‌
What about the Volcker disinflation? Income Inequality
Earnings Inequality
0.1 0.1
0.08 0.06
0.05
0.04 0 0.02 -0.05
0 -0.02 1985
1990
1995
2000
2005
1985
Expenditure Inequality
1990
1995
2000
2005
Consumption Inequality 0.04
0.06 0.04
0.02 0.02 0
0 -0.02
-0.02 -0.04 1985
1990
1995
2000
2005
1985
1990
1995
but likely contributed to the rising expenditure and consumption inequality of the 1980s.
2000
2005
What about in recent years?
What about in recent years? 7
6
5
4
3
2 FFR Target Range
1
0
-1
Actual FFR
Predicted Values
-2 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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.
What about in recent years? 7
6
5
4
3
2 FFR Target Range
1
0
-1
Actual FFR
Predicted Values
-2 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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.