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Income Distribution and Monetary Policy in Small Open Economies

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  • Christopher Malikane

Abstract

This paper investigates the role of income distribution in a small monetary model for policy analysis and assesses whether a central bank in a small open economy can improve economic performance by paying explicit attention to changes in income distribution. The study answers this question by reformulating a Ball-Svensson type macromodel, extended to incorporate both sluggish nominal wage and price adjustment and income distribution effects on aggregate demand. Further, it is observed that a simple price inflation targeting rule that does not react explicitly to changes in income distribution is incapable of achieving macrostability. The study shows that a simple rule that targets the productivity-adjusted nominal wage inflation rate is capable of achieving macrostability. These findings motivate income distribution sensitive monetary policy rules.

Suggested Citation

  • Christopher Malikane, 2007. "Income Distribution and Monetary Policy in Small Open Economies," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(1), pages 6-18, February.
  • Handle: RePEc:icf:icfjmo:v:05:y:2007:i:1:p:6-18
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