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International spillovers of US monetary policy on inequality

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  • Dash, Pradyumna
  • Kumar, Ankit
  • Subramanian, Chetan

Abstract

This study investigates the effects of U.S. monetary policy on income inequality in open economies from 1970 to 2016. We find that a 100-basis-point increase in the federal funds rate leads to a cumulative reduction of about 0.15% in income inequality over three years. Interestingly, we show that the effect of US monetary policy on inequality varies over time. The impact also varies by exchange rate regime: in flexible regimes, the reduction can reach nearly 0.3%, while in pegged regimes, it diminishes to around 0.13%. This impact in pegged regimes is influenced by wage rigidity and labor market regulations in the economy. To explain these results, we develop a two-agent small open economy model that incorporates rigid wages, highlighting the link between monetary policy and inequality dynamics.

Suggested Citation

  • Dash, Pradyumna & Kumar, Ankit & Subramanian, Chetan, 2026. "International spillovers of US monetary policy on inequality," Economic Modelling, Elsevier, vol. 155(C).
    • Handle: RePEc:eee:ecmode:v:155:y:2026:i:c:s0264999325004341
    DOI: 10.1016/j.econmod.2025.107439
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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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