The Distributional Effects of Expansionary Monetary Policy

Abstract

Monetary expansion can lead to inflation. Using economy-wide measures, such as the all item CPI or the GDP deflator, these effects can be quantified, but this leaves open the question of which prices are inflating more, and thus whether monetary expansion is more harmful to the rich or poor, depending on their respective consumption patterns. This paper constructs quarterly consumer price indices specific to each income quintile in the United States from 1990 to 2022. Using transfer function autoregressive moving average models with exogenous regressors (ARMAX), significant inflationary effects of monetary expansion CPIs for the lowest income quintile are observed that are independent of changes in the CPI for higher income quintiles. More generally, households that are likely to spend a higher proportion of income on goods with inelastic demand experience higher inflation rates. These effects, which are robust to specification, are caused by monetary expansion from Federal Reserve purchases of government debt, but not other assets.