Abstract
Evidence reveals that positive trade openness shock reduces both the income and consumption inequalities. Evidence from counterfactual VAR models which shut off the trade openness variables in transmitting contractionary monetary policy shocks to income inequality, reveals that the counterfactual income inequality growth rises more than the actual reaction. This suggests that trade openness channel dampens the rising income inequality due to contractionary monetary policy shock. The trade openness channel mitigates the increase in income inequality by nearly half of the peak increase, following contractionary monetary policy shock.
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