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We use the functional autoregressive framework of Chang, Chen, and Schorfheide (2024) to examine the effects of monetary policy shocks on the cross-sectional distributions of U.S. earnings, consumption, and financial income. An expansionary shock reduces earnings inequality, primarily by moving individuals out of unemployment, increases consumption inequality, mainly through spending on durable goods, and raises financial income inequality. We further show how an internal instrument can be used to identify the central bank’s reaction function within a VAR framework.
