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Monetary Policy and Interest rate Volatility – The Role of Inequality and Imperfect Credit Market

Author

Listed:
  • Sugata Marjit
  • Suryaprakash Mishra
  • Sanghita Mandal
  • Mayukh Basu

Abstract

Inequality of wealth or liquid finance in a system with credit market imperfection adversely affects investment by poor investors. This is well known in the literature. In this paper we prove that the aggregate credit demand function would be relatively inelastic with unequal wealth distribution as the average borrowing cost would be greater for people with lower endowment of self-owned capital. Hence, the supply side impact of monetary policy would have different impact on the rate of interest in markets with different degrees of inequality as measured by the elasticity of credit demand. Volatility of interest rate would be higher with greater inequality. For similar types of monetary policy, attaining policy targets would be relatively difficult in such markets.

Suggested Citation

  • Sugata Marjit & Suryaprakash Mishra & Sanghita Mandal & Mayukh Basu, 2026. "Monetary Policy and Interest rate Volatility – The Role of Inequality and Imperfect Credit Market," CESifo Working Paper Series 12556, CESifo.
    • Handle: RePEc:ces:ceswps:_12556
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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