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Monetary Policy And The Distribution Of Income

  • Bhattacharya, Joydeep

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.

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File URL: http://www2.econ.iastate.edu/papers/p1830-2003-12-03.pdf
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 11072.

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Date of creation: 03 Dec 2003
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Handle: RePEc:isu:genres:11072
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Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

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