Monetary Policy And The Distribution Of Income
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.
|Date of creation:||03 Dec 2003|
|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
References listed on IDEAS
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, 2005.
"Entrepreneurship, frictions, and wealth,"
Working Paper Series
WP-05-09, Federal Reserve Bank of Chicago.
- Abhijit V. Banerjee & Andrew F. Newman, 1991. "Risk-Bearing and the Theory of Income Distribution," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 211-235.
- Christina D. Romer & David 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.
- John H. Boyd & Ross Levine & Bruce D. Smith, 1997.
"Inflation and financial market performance,"
573, Federal Reserve Bank of Minneapolis.
- Bhattacharya, Joydeep, 1998.
"Credit Market Imperfections, Income Distribution, and Capital Accumulation,"
Staff General Research Papers Archive
5105, Iowa State University, Department of Economics.
- Joydeep Bhattacharya, 1997. "Credit market imperfections, income distribution, and capital accumulation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(1), pages 171-200.
- Stephen D. Williamson, 1987.
"Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 102(1), pages 135-145.
- Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
- Blanchflower, David G & Oswald, Andrew J, 1998.
"What Makes an Entrepreneur?,"
Journal of Labor Economics,
University of Chicago Press, vol. 16(1), pages 26-60, January.
- Kiminori Matsuyama, 2000.
Review of Economic Studies,
Oxford University Press, vol. 67(4), pages 743-759.
- Rajan, Raghuram G & Zingales, Luigi, 1998.
"Financial Dependence and Growth,"
American Economic Review,
American Economic Association, vol. 88(3), pages 559-586, June.
- Raghuram G. Rajan & Luigi Zingales, "undated". "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
- 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 767-790, 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).
- Charles T. Carlstrom & Timothy S. Fuerst, 1996.
"Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis,"
9602, Federal Reserve Bank of Cleveland.
- 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.
- Galor, Oded & Zeira, Joseph, 1988.
"Income Distribution and Macroeconomics,"
51644, University Library of Munich, Germany, revised 01 Sep 1989.
- 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 141-152, Summer.
- 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.
- Haslag, Joseph H., 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.
- Haslag, Joseph H. & Hein, Scott E., 1990. "Does it matter how monetary policy is implemented?," Working Papers 9009, Federal Reserve Bank of Dallas.
- Mohsin S. Khan & Abdelhak S Senhadji & Bruce D. Smith, 2001.
"Inflation and Financial Depth,"
IMF Working Papers
01/44, International Monetary Fund.
- 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.
- Elisabeth Huybens & Bruce D. Smith, 1997.
"Inflation, Financial Markets and Long-Run Real Activity,"
9707, Centro de Investigacion Economica, ITAM.
- 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.
- 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 120-138, March.
- 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 539-561, October.
- 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.
When requesting a correction, please mention this item's handle: RePEc:isu:genres:11072. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Curtis Balmer)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.