Federal Reserve policy and inflation dynamics in the U.S.: Racial inequalities in unemployment outcomes

This paper explores the relationships behind previous findings that Federal Reserve interest rate policies have a larger impact on black unemployment compared to white unemployment. Most earlier studies employ a VAR methodology, which does not, however, permit a structural analysis of key relationships. This paper accounts for the endogeneity of unemployment, inflation, and the federal funds rate by estimating a system of structural equations with quarterly data from 1973 to 2008. We find that the higher the black/white unemployment rate ratio, the less responsive interest rate policy is to unemployment. Further, our evidence indicates that a higher relative black unemployment rate reduces the economy-wide ‘sacrifice’ ratio.