Distinct Distributional Effects of Unconventional Monetary Policy in the Western World

Abstract

In the period following the financial crisis of 2008, select central banks around the world participated in quantitative easing (QE), the unconventional technique of monetary policy, in hope to reduce the severity of the recession for their respective economies. This sparked much academic discussion on the effectiveness of such policies, and importantly, its unintended consequences. Through Vector Autoregression modelling (VAR), we will analyze the causality of QE on income inequality and explore the major redistribution channels at work for each country. The 5 countries included are: The United States (U.S.), Canada, the United Kingdom (U.K.), Germany (representing a country under the European Central Bank control), and Japan. Each country has an economy that is strongly linked to the U.S. and were each heavily impacted by the Great Recession. Prior research indicates that inequality levels in the U.S. have spiked since the recession. This research aims to answer if unconventional monetary policy has a large effect on income inequality, and why it may have different effects in different countries. This comparison may help in finding a solution for the U.S. to minimize the accidental redistribution effects of its government policies.