Geopolitical Risk and Income Inequality: Evidence from the US Economy

Our paper empirically examines the impact of geopolitical risk on income inequality in the US economy during the period (1949–2020). The US is a dominant nation on the international scene via its military power, political influence, and economic impacts during the past eight decades. Therefore, its economy is susceptible to uncertain events and various risks. For this reason, we employ the US and international geopolitical risks as the main explanatory variables. The current paper constructs a model and uses the bounds testing approach to cointegration to approximate the parameters of the Autoregressive Distributed Lag model. This methodology generates short-term and long-term parameters, which assist in analyzing the effect of geopolitical risks on income inequality. Our paper finds that geopolitical risks improve income inequality in the short run, while it worsens income inequality in the long run. Our results’ robustness check uses the Palma ratio as a dependent variable instead of the Gini coefficient and generates identical results. Our paper introduces a primary policy implication obtained from our outcomes.