Did quantitative easing impact wealth inequality?
Abstract: On November 25, 2008, the Federal Reserve initiated what came to be the largest Asset Purchase Program in history1, the Large-Scale Asset Purchase Program, widely known a quantitative easing (QE). When the Federal Reserve in October 29, 2014, announced the end of the program, they held $4.5 trillion worth of assets. This rather unconventional monetary policy came in the aftermath of the 2008 financial crisis and since its implementation, critics have argued that the policy increases inequality in terms of income and wealth. Studies on the impact of QE on income inequality lead to divergent conclusions, but the close link between QE and the stock markets, as explained by the Portfolio Rebalancing Effect, suggests that QE should increase wealth inequality. This hypothesis however, relies on a crucial assumption, namely that richer households hold a larger portion of their wealth in stocks. As other assets of a household, such as the primary residence, are likely to increase less than proportionally with wealth, I find it plausible that the portion allocated to direct or indirect stock holdings increases with wealth, resulting in a higher exposure to stocks for the very rich. Statistics from the Survey of Consumer Finances, presented in this paper, confirm that richer households indeed have the higher exposure to stocks. I use a difference-in-difference model to estimate the causal impact of QE on wealth inequality in the United States and my results suggests that wealth inequality attributable to QE) increased with at least 25 percent, measured as a change in the wealth-ratio between the 9th decile of households and the artificial middle-income household constructed in accordance with the Synthetic Control Method.
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