We examine the contribution of supply and demand shocks to income inequality in a panel setting. Leveraging the newly created Global Repository of Income Dynamics, we study the relationship between unanticipated supply and demand shocks and income inequality, distinguishing between domestic and international (US) shocks. Our results showthat shocks originating in the United States, on average, increase income dispersion in other developed countries: demand shocks tend to produce stronger reactions than supply shocks. We explore different transmission channels: trade, financial and expectations. The trade channel appears particularly relevant for supply shocks. Comparing these external shocks with domestic counterparts, we find that domestic demand shocks exhibit similar dynamics, while domestic supply shocks are associated with declines in income inequality.
