Policy Uncertainty, Tariff Rate, Monetary Policy and Income Inequality: An Asymmetric Analysis

Abstract

This study offers a contribution to the income inequality literature within the traditional Kuznets model and explores the relationship between income inequality and a set of macroeconomic variables such as policy uncertainty, tariff rate, and monetary policy. By implementing a Nonlinear Autoregressive Distributed Lag (ARDL) model, I aim to identify the possible nonlinear effects of policy uncertainty, tariff rate -as a measure of trade openness-, and monetary policy on income inequality in United States and its 50 states and District of Columbia. The advantage of choosing this methodology is that it helps researchers to explain both long run relationships and short run dynamics. Results from linear model that assume effects are symmetric, do not show any significant links between the set of variables and income inequality. However, the empirical results from nonlinear model that assumes effects are asymmetric reveal that they have nonlinear effects on the U.S income inequality as well as on state level income inequality. Results show that a decline in policy uncertainty will increase U.S. income inequality in the long run, while an increase in it does not have any significant effect. A contractionary monetary policy (decline in monetary base to GDP ratio) decreases U.S. income inequality in the long run while an expansionary monetary policy will not affect it. Estimates from nonlinear model do not show any link between U.S tariff rate and income inequality. More observation from state-level data show that policy uncertainty, tariff rate, and monetary policy have asymmetric effect on income inequality in many states.