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The impact of monetary policy on income inequality: Does inflation targeting matter?

Author

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  • Tavares Garcia, Francisco
  • Cross, Jamie L.

Abstract

Does inflation targeting affect the nexus between monetary policy and income inequality? We address this question by estimating country-specific structural vector autoregression models across the G7 economies. We find that contractionary monetary policy shocks increase income inequality when using a long period of data from 1974–2019. However, controlling for the adoption of inflation targeting reduces the size of this effect in Japan and the UK, and it disappears altogether in Canada and the US. This suggests that country-specific inflation targeting may mitigate the inequality-inducing effects of unanticipated monetary contractions. In contrast, mixed evidence is found for Eurozone countries: France, Germany, and Italy.

Suggested Citation

  • Tavares Garcia, Francisco & Cross, Jamie L., 2024. "The impact of monetary policy on income inequality: Does inflation targeting matter?," Finance Research Letters, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000369
    DOI: 10.1016/j.frl.2024.105006
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    More about this item

    Keywords

    Monetary policy; Income inequality; Inflation targeting; SVAR;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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