MONETARY
POLICY
AND
INEQUALITY
718 words
[26296993]
Index
1) Introduction
3
2.1) Monetary policy and economic growth
3
2.2) Monetary policy during recessions
3
2.3) Asset price inflation and monetary policy
4
2.4) Money policy and big firms
4
3) Conclusion
5
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1) Introduction
In a market economy, monetary policy is one of the main ways that government authorities can
regularly influence the pace and direction of overall economic activity, which is not only the
level of aggregate output and employment, but also the average rate at which prices rise or fall
(Friedman, 2000). The ability of central banks to implement monetary policy stems from their
monopoly status as suppliers of their own liabilities, which banks in turn require in order to
generate the money and credit used in daily economic transactions. This essay will be discussing
the different ways that monetary policy effects inequality in the economy.
2.1) Monetary policy and economic growth
Supporters of monetary policy argue that it can have a positive impact on inequality by
promoting economic growth and job creation. Monetary stimulus encourages economic
expansion, which in turn increases employment and fosters a wage rise (Silvo, et al., 2022). The
impacts of monetary policy on households vary based on how effectively the policies are
represented in household earnings and employment across various income levels. As
unemployment is more common on average among low-income households, these households
particularly benefit from the development of new jobs. Thus, a lenient monetary policy may
lessen income disparity.
2.2) Monetary policy during recessions
Historically, monetary policy has proven to be effective in combatting the negative impact of
recessions. Measures like quantitative easing can help to stabilize the economy, where the
Federal bank will opt to buy government bonds and securities in order to boost the economy and
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bring more money into circulation for the economy to function at a normal level (Hetzel, 2012).
The recent data, following the COVID-19 recession, supports this statement. The results show
that the US economy would have experienced a much lower level of activity without the use
of quantitative easing, by relying on existing structural approaches in a context of mixed
frequency data (Feldkircher, et al., 2021). This means the US Fed has been effective in reducing
the COVID-19 crisis's economic effects thus far, subsequently fighting potential rises in
inequality.
2.3) Asset price inflation and monetary policy
The relationship between monetary policy and asset price inflation is important, yet complex.
The policy makers use information regarding asset prices when making decisions about their
policies, but in return these policies influence the asset prices (Rigobon & Sack, 2004). Critics of
the monetary policy argue that monetary policy can contribute to asset price inflation, which can
exacerbate inequality. Investors may be more inclined to invest in stocks, real estate, and other
assets when interest rates are low (a negative shock to monetary policy), which may increase the
price of those assets. This may result in a gain in wealth for individuals who hold these assets
and a decrease in relative worth for others who do not, further increasing the gap between the
wealthy and the poor.
2.4) Money policy and big firms
Some economists argue that monetary policy can contribute to income inequality because of the
problem of “too big to fail” institutions. Businesses that are flush with cash as a consequence of
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increased earnings and margins brought about by dominating market positions are less dependent
on credit, and as a result, are less sensitive to credit regulation (Dolan, 2021). The difficulty for
central banks grows when there are more of such businesses that dominate overall economic
activity. According to a study done by the IMF research staff, a 100 basis point increase in the
Federal Reserve's policy rate for U.S. businesses caused firms with modest markups to reduce
sales by 2% after a year, but had almost no impact on the production of firms with large markups
(Duval, et al., 2021). These statistics make it evident that monetary policy can further increase
inequality between small and big business.
2.5) Conclusion
In conclusion, the impact of monetary policy on inequality is complex and multifaceted.
Supporters of monetary policy maintain that it may foster economic expansion and job creation,
while critics claim that it can deepen inequality by benefitting the rich and causing an increase in
asset price inflation. Ultimately, the effect of monetary policy on inequality will rely on a
number of variables, including the precise policy measures used, the larger economic and
political backdrop, and the distributional impact of these policies on different parts of society.
Reference list
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