Monetary policy and inequality in the US – The links

Possible channels linking monetary policy and inequality 

Proponents of this view focus on two channels through which monetary policy affects inequality.

Heterogeneity in income sources

While most households rely predominantly on labour incomes, for others financial income, business income, or transfers may be more important. If expansionary policy raises profits by more than wages, wealth will tend to be reallocated toward the already wealthy.

Financial market segmentation.

Money supply changes are implemented through financial intermediaries. Increases in the money supply will therefore generate extra income, at least in the short run, for financiers and their high-income clients.

However, there are in principle a number of other channels through which monetary policy could also affect inequality.

Portfolio effects

If some households hold portfolios which are less protected against inflation than others, then inflation will cause wealth redistribution. For example, low-income households typically hold a disproportionate share of their assets in the form of currency.

Heterogeneity in labour income responses

Low-income groups tend to experience larger drops in labour income and higher unemployment during business cycles than high-income groups.

Borrowers versus savers

Higher interest rates, or lower inflation, benefit high net worth households (savers) at the expense of low net worth households (borrowers).

While the portfolio channel goes in the same direction as those emphasised by the Austrian economists, the other two channels point to effects of monetary policy that go precisely in the opposite direction: contractionary (rather than expansionary) monetary policy will tend to increase inequality.

What does monetary policy actually do to inequality?

In light of these different channels, the effect of monetary policy on economic inequality is a priori ambiguous.

Chosen excerpts by Job Market Monitor. Read the whole story at  Monetary policy and inequality in the US | VOX, CEPR’s Policy Portal.