Table of Contents
There is an increase in the concern of the growing finance inequality and different fiscal policies which require empirical analysis to understand. The purpose of this paper is to conduct an empirical analysis of the financial and monetary policies in the United States from 1995-2016. Additionally, the paper will determine the GDP of United States.
Monetary policies have a major impact on the distribution of income. There are cases in the United States where income is also redistributed through the monetary policy. Some of the redistribution channels used in the monetary policy include transmission channels such as economic growth and income inequality. The financial and monetary policies are widely used for the purpose of comparatively different macroeconomic objectives (DeNavas-Walt, p. p. 12). For example, these policies are used to control the inflation and increase aggregate output. Additionally, these policies have a major impact on the same economic activities which may include redistribution and are mostly in constant interaction with each other.
Through the use of empirical analysis, we will be able these policies from 1995-2016. In the United States, high inflation result into uncertainties, increase the expectations of the future macroeconomic stability and may also disrupt the financial market. In some cases, it might result in distortionary financial policies. The estimated impact of the monetary policies may be affected by the inequality measure which is used in the empirical analysis (DeNavas-Walt, p. 34). The impact estimated may differ in cases where the inequality measure resulting from another source of data and lack to represent the share of the entire population and most commonly, the top one percent.
Since 1995, the United States dynamics of income inequality has been driven by variation in the upper end of the distribution. The evaluation of the distributional effects of the monetary policies in the United States is part of the empirical analysis by the use of inequality measures by covering the entire income distribution and must include the top one percent (Garriga, p. 98). The analysis has identified some co-integration between prices, real outcomes, Gini index of the income inequality and federal fund rates. Some of the models used in the analysis include equivalent vector regression and vector error correction to analyze the relationship. Additionally, empirical analysis has used contemporaneous identification together with ex-ante with long run identification and monetary policy shocks.
According to the analysis, even though the monetary policies have an impact on real economic activity and prices, they also affect the redistributive impact. Therefore, the analysis has also included the United States real GDP and prices in the models.
The distribution effects of the policy are examined and implemented through the use of multiple time series analysis (Garriga, p. 98). Through the use of these models, the analysis assists in tackling the endogeneity problems which might exist among the variables and also, it enable the study of their interrelations. The vector autoregression which was considered as p, VAR is:
Yt=AyYy-1+…+ ApYt-p+ Ut
Yt is the vector of the endogenous variable, while Ay is the 4 x 4 co-efficiency matrix and Ut= Ut1… Ut2 is the error term.
GINI index for the income inequality is calculated for the entire population. To evaluate the distractive effects of monetary policy some of the factors considered include measuring the income inequality where it includes the top 1% of the finance distribution (Svensson, p. 67). According to the results, the augmentation of the inequality measure is the major impact when evaluating the distributive monetary policy effects.
The United States GDP
To compute the real GDP of the United States, which is (GDP60)3 data used is from nominal GDP and the deflectors which originate from the World Bank and FRED (Federal Reserve Economic Database) respectively. The CPI (CPIX60) and (GDPDX60) which is the GDP deflator are used as base indices. In this analysis, FRED is the source of GDP deflator and CPI.
From 1995-2016 United States experienced visible structure breaks and during this period, they expected the series for the real GDP. There was also a visible break in the united GDP in 2002, followed by a structural break in the relationship between the macroeconomic variables and income inequality (Svensson, p. 129). According to the analysis, United States experienced moderate inflation from 1996-2016 with the relationship between the inflation and economic inequality being linear. As a result, the time dimension has experienced a relationship between the finance and monetary policies which has abstracted from the magnitude of the effect of inflation on the inequality, and it indicated to be nonlinear (Garriga, p. 36). From the empirical analysis, the United States real GDP in 2016 is: mean is $6074, which experienced 2.9% growth while GDP deflector is $149 and annual, percentage change of 2.8%.
- DeNavas-Walt, Proctor. Income and Poverty in the United States; Current Population Reports, 2013. U. S. Census Bureau.
- Garriga, Kydland & Sustek. Mortgages and Monetary Policy, St. Louis Federal Reserve Working Paper. 2013, 2013-037.
- Global Financial Stability Report: Market Developments and Issues. Washington: International Monetary Fund, 2012. Internet resource.
- Svensson, L. E. O. Inflation Targeting and Learning against the Wind. International Journal of Central Banking 10, 2014, 103-114.