7. Does Financial Globalisation Impact the Link Between Monetary Policy and Income Inequality?

The chapter applies a counterfactual analysis to show the role of net capital inflow channel in transmitting tight monetary policy shocks to growth of income inequality. We find that counterfactual growth of income inequality rises less than the actual responses. This evidence suggests that net capital inflow channels dampen the increase in income inequality, following a tight monetary policy shock. This may be indicative of the dominance of exchange rate appreciation and reduction in consumer price inflation in lowering income inequality. And not the reduction in economic growth, following tight monetary policy shocks. From policy perspective, this calls for optimal monetary response to consider the income inequality reaction in the calibration of monetary policy effects on the optimal net capital inflows to have a desirable effect from a social perspective.