Oil Price Shocks and Income Inequality

Abstract

This study, using the local projections, investigates linear and nonlinear impulse responses of the United States (US) household income inequality to oil price shocks. Oil price shocks are disaggregated according to the origin to test the dynamic response of income inequality to oil price structural shocks which are contingent on the status of oil dependence in individual US states. The results, based on the linear projection model, show that oil supply shocks lead to higher income inequality in the short term, but lower-income inequality in the medium and long terms. Moreover, economic activity shocks and oil inventory demand shocks mainly exert negative impacts on income inequality over time. Both positive and negative effects of oil consumption demand shocks on income inequality are observed. The nonlinear impulse response results reveal some evidence of heterogeneous responses of income inequality to oil price shocks between high- and low-oil-dependent US states.