Monetary Policy And The Distribution Of Income
AbstractThis paper represents a first attempt at a tractable analysis of how monetary policy influences the income distribution in an economy. It presents a monetary growth model in which inflation affects credit market efficiency, and via this link, influences capital accumulation, and the income distribution. In the model, a fraction of the population is capitalists, who have access to a risky but high return capital production technology. Capital investment must be partially externally financed via workers' savings, and is subject to a costly state verification (CSV) problem. Successful capitalists leave bequests to their offspring which serve as internal finance, more of which promotes credit market efficiency and capital formation. Inflation acts as an unavoidable tax on the capital incomes of the capitalists thereby reducing their bequests and worsening the CSV friction. Computational experiments reveal that in the model economy, irrespective of whether the government rebates the proceeds of the inflation tax to capitalists or workers, inflation decreases the steady-state capital stock, although the capital stock is highest when all transfers go to workers. The regime where workers get the entire transfer is shown to be "superior" in many respects to one where the capitalists get all the transfer. When monetary policy is instead implemented via changes in the reserve requirement, the effects are largely similar except that the regime where seigniorage is rebated to workers is clearly preferred by all workers and all capitalists.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 11072.
Date of creation: 03 Dec 2003
Date of revision:
Contact details of provider:
Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
More information through EDIRC
bequests; asymmetric information; external finance; capital accumulation; inflation; bankruptcy; income distribution;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-06-13 (All new papers)
- NEP-CBA-2003-12-07 (Central Banking)
- NEP-DGE-2004-06-13 (Dynamic General Equilibrium)
- NEP-MAC-2004-06-13 (Macroeconomics)
- NEP-MON-2004-06-13 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Marco Cagetti & Mariacristina De Nardi, 2003.
"Entrepreneurship, frictions and wealth,"
620, Federal Reserve Bank of Minneapolis.
- Christina D. Romer & David H. Romer, 1998.
"Monetary Policy and the Well-Being of the Poor,"
NBER Working Papers
6793, National Bureau of Economic Research, Inc.
- Christina D. Romer & David H. Romer, 1998. "Monetary policy and the well-being of the poor," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 159-201.
- Christina D. Romer & David H. Romer, 1999. "Monetary policy and the well-being of the poor," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 21-49.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Kessler, Denis & Masson, Andre, 1989. "Bequest and Wealth Accumulation: Are Some Pieces of the Puzzle Missing?," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 141-52, Summer.
- John H. Boyd & Ross E. Levine & Bruce D. Smith, 1996.
"Inflation and financial market performance,"
9617, Federal Reserve Bank of Cleveland.
- Joseph H. Haslag, 1993.
"Does it matter how monetary policy is implemented?,"
9310, Federal Reserve Bank of Dallas.
- Haslag, Joseph H. & Hein, Scott E., 1995. "Does it matter how monetary policy is implemented?," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 359-386, April.
- Joseph H. Haslag & Scott E. Hein, 1990. "Does it matter how monetary policy is implemented?," Research Paper 9009, Federal Reserve Bank of Dallas.
- Williamson, Stephen D, 1987.
"Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing,"
The Quarterly Journal of Economics,
MIT Press, vol. 102(1), pages 135-45, February.
- Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
- Raghuram G. Rajan & Luigi Zingales, 1996.
"Financial Dependence and Growth,"
NBER Working Papers
5758, National Bureau of Economic Research, Inc.
- Blanchflower, D.G. & Oswald, A., 1991.
"What Makes an Entrepreneur?,"
Economics Series Working Papers
99125, University of Oxford, Department of Economics.
- Heer, Burkhard & Sussmuth, Bernd, 2007.
"Effects of inflation on wealth distribution: Do stock market participation fees and capital income taxation matter?,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 31(1), pages 277-303, January.
- Bencivenga, Valerie R & Smith, Bruce D, 1992.
"Deficits, Inflation, and the Banking System in Developing Countries: The Optimal Degree of Financial Repression,"
Oxford Economic Papers,
Oxford University Press, vol. 44(4), pages 767-90, October.
- Bencivenga, V.R. & Smith, B.D., 1990. "Deficits, Inflation, And The Banking System In Developing Countries: The Optimal Degree Of Financial Repression," RCER Working Papers 214, University of Rochester - Center for Economic Research (RCER).
- FA Al-Marhubi, 2000. "Income inequality and inflation: the cross-country evidence," Contemporary Economic Policy, Western Economic Association International, vol. 18(4), pages 428-439, October.
- Huybens, Elisabeth & Smith, Bruce D., 1999.
"Inflation, financial markets and long-run real activity,"
Journal of Monetary Economics,
Elsevier, vol. 43(2), pages 283-315, April.
- Elisabeth Huybens & Bruce D. Smith, 1997. "Inflation, Financial Markets and Long-Run Real Activity," Working Papers 9707, Centro de Investigacion Economica, ITAM.
- Matsuyama, Kiminori, 2000.
Review of Economic Studies,
Wiley Blackwell, vol. 67(4), pages 743-59, October.
- Banerjee, Abhijit V & Newman, Andrew F, 1991.
"Risk-Bearing and the Theory of Income Distribution,"
Review of Economic Studies,
Wiley Blackwell, vol. 58(2), pages 211-35, April.
- Abhijit Banerjee & Andrew F. Newman, 1989. "Risk-Bearing and the Theory of Income Distribution," Discussion Papers 877, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Joydeep Bhattacharya, 1997.
"Credit market imperfections, income distribution, and capital accumulation,"
Springer, vol. 11(1), pages 171-200.
- Bhattacharya, Joydeep, 1998. "Credit Market Imperfections, Income Distribution, and Capital Accumulation," Staff General Research Papers 5105, Iowa State University, Department of Economics.
- Boyd, John H & Smith, Bruce D, 1994. "How Good Are Standard Debt Contracts? Stochastic versus Nonstochastic Monitoring in a Costly State Verification Environment," The Journal of Business, University of Chicago Press, vol. 67(4), pages 539-61, October.
- Galor, Oded & Zeira, Joseph, 1993.
"Income Distribution and Macroeconomics,"
Review of Economic Studies,
Wiley Blackwell, vol. 60(1), pages 35-52, January.
- Mohsin S. Khan & A. Senhadji Semlali & Bruce D. Smith, 2001.
"Inflation and Financial Depth,"
IMF Working Papers
01/44, International Monetary Fund.
- Carlstrom, Charles T & Fuerst, Timothy S, 1997.
"Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis,"
American Economic Review,
American Economic Association, vol. 87(5), pages 893-910, December.
- Ryo Kato, 2002. "Matlab code for the Carlstrom-Fuerst AER (1997) model," QM&RBC Codes 112, Quantitative Macroeconomics & Real Business Cycles.
- Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
- King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
- Wadhwani, Sushil B, 1986. "Inflation, Bankruptcy, Default Premia and the Stock Market," Economic Journal, Royal Economic Society, vol. 96(381), pages 120-38, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephanie Bridges) The email address of this maintainer does not seem to be valid anymore. Please ask Stephanie Bridges to update the entry or send us the correct address.
If references are entirely missing, you can add them using this form.