The effects of demand and supply shocks on income inequality and price heterogeneity: evidence from Korea*

We analyze the impact of demand and supply shocks on income inequality and price heterogeneity using data from Korea. We identify structural demand and supply shocks using long-run restrictions and estimate the effects of these shocks on the income distribution and income-specific CPIs using a local projection model. The results reveal that both negative demand and supply shocks significantly worsen income inequality. The effect of a demand shock on income distribution is long-lasting, whereas a supply shock worsens the indices in the relatively short run. Moreover, when a negative demand shock occurs, the income-specific CPIs for low-income group decreases less, whereas when a negative supply shock occurs, the income-specific CPIs for low-income group rises further. These findings imply that both shocks exacerbate price heterogeneity.