Estimating the effects of disinflationary monetary policy on minorities

There are solid theoretical reasons, based on concepts such as “ladder effects”, to believe that disinflationary monetary policy disproportionately burdens low-income individuals. Minority groups in the U.S. tend to have lower incomes than whites. An implication of this wage gap is that the burden of contractionary monetary policy should fall on minorities. This paper uses identified vector autoregressions (VARs), narrative evidence, and the Romer and Romer [Romer, C., & Romer, D. (1989). Does monetary policy matters? A new test in the spirit of Friedman and Schwartz. NBER Macroeconomic Annual, 4, 121–170.] approach to investigate whether this is so. The results indicate that disinflationary monetary policy increases unemployment among minorities approximately twice as much as it does among whites. The Federal Reserve (Fed) should take account of these effects when considering implementing disinflationary policy.