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Monetary Policy And The Distribution Of Income

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  • Bhattacharya, Joydeep

Abstract

This 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.

Suggested Citation

  • Bhattacharya, Joydeep, 2003. "Monetary Policy And The Distribution Of Income," Staff General Research Papers Archive 11072, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:11072
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    More about this item

    Keywords

    bequests; asymmetric information; external finance; capital accumulation; inflation; bankruptcy; income distribution;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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 - - - Investment; Capital; Intangible Capital; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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