Abstract
Using Piketty and Zucman’s (Q J Econ 129(3):1255-1310, 2014) recently published capital share data, this paper uses structural VARs to understand the relationship between long-term interest rates, capital shares, and the distribution of income in the United States. The results indicate that increases in capital shares increase income inequality. Moreover, the relationship between the interest rate and capital shares is found to be negative and statistically significant. The results suggest that low long-term rates, through an equity and business investment channel, further increase the unequal distribution of income in the U.S. The results further illuminate the channels through which monetary policy can potentially affect the distribution of income.
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Notes
The output and capital share series are net of depreciation.
Using the Akaike Information Criterion, a one-year lag is used to estimate Model 1.
Since the results are consistent across the three specifications of capital shares, we only report the results for the capital share specification that excludes the government interest rate. Results for capital share specifications that include the government interest rate and adjust for taxes are available upon request.
Bhattarai and Neely (2016) review empirical studies on the effects of U.S. unconventional monetary policy on both financial markets and the real economy. They claim that unconventional policies have had strong impacts on domestic and international asset prices and have been successful in averting deflation and output collapse.
Note, the analysis includes growth rates of variables and it is standard not to get larger numbers on variance decompositions from the contributions of other variables.
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This research was prepared by the author (John Meszaros) in his personal capacity. The opinions expressed in this article are the author's own and do not necessarily reflect the views of the United States Postal Service or the United States government.
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Berisha, E., Meszaros, J. Long-Term Rates, Capital Shares, and Income Inequality. Open Econ Rev 31, 619–635 (2020). https://doi.org/10.1007/s11079-019-09539-5
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DOI: https://doi.org/10.1007/s11079-019-09539-5