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2019 | OriginalPaper | Chapter

4. Does the Income Inequality Channel Impact the Transmission of Monetary Policy Shocks to Economic Activity?

Authors : Eliphas Ndou, Thabo Mokoena

Published in: Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty

Publisher: Springer International Publishing

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Abstract

Evidence from counterfactual analysis reveals that the income inequality channel accentuates the decline in real economic activity following contractionary monetary policy shocks. In addition, income inequality dampens the increases in marginal propensity to consume, employment growth, GDP growth and disposable income growth due to the expansionary monetary policy shocks. From a policy perspective, Monnin (2017) argues that income inequality matters in understanding and gauging the reaction of the economy to monetary policy impulses. Hence policymakers should take this dimension into account when designing and calibrating policies. This should happen despite income inequality not being depicted in the standard monetary policy transmission mechanism.

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previous chapter Does the Inflation Rate Below 4.5% Matter for the Distributional Effects of Positive Inflation Shocks on Income Inequality in South Africa?
next chapter Do Monetary Policy Shocks Influence Income Inequality Dynamics in South Africa?
Footnotes
1
It is indicated in Areosa and Areosa (2016) that the combination of heterogeneous labour productivity among households and limited financial market participation is linked to inflation and inequality.
 
2
Voinea and Monnin (2017) find that the transmission of monetary policy is more efficient for middle income households.
 
3
This requires estimating the magnitude of the inequality transmission channel through which monetary policy influences the economy.
 
4
This is calculated as 5 year rolling impact of household disposable income on household consumption.
 
Literature
Areosa, W. D., & Areosa, M. B. M. (2016). Inequality channel of monetary transmission. Journal of Macroeconomics, 48, 214–230.CrossRef
Bilbie, F. O. (2008). Limited asset markets participation, monetary policy and inverted aggregate demand logic. Journal of economic theory, 31(2), 463–496.
Bulir, A. (2001). Income inequality: Does inflation matter? IMF Staff Papers, 48(11), 1–5. Palgrave Macmillan.
Coibion, O. (2012). Are the effects of monetary policy shocks big or small? American Economic Journal of Macroeconomics, 4(2), 1–32.CrossRef
Doepke, M., Scheneider, M., & Selezneva, V. (2015). Distribution effects of monetary policy (Working Paper).
Furceri, D., & Loungani, P. (2018). The distributional effects of capital account liberalization. Journal of Development Economics, 130, 127–144.CrossRef
Guerello, C. (2016). Conventional and unconventional monetary policy vs. households income distribution: An empirical analysis for the euro area (mimeo).
Gumata, N., & Ndou, E. (2017). Labour market and fiscal policy adjustments to shocks: The role and implications for price and financial stability in South Africa. Cham, Switzerland: Palgrave Macmillan.
Koedijk, K., Loungani, P., & Monnin, P. (2018). Monetary policy, macroprudential regulation and inequality: An introduction to the special section. Journal of international money and finance, 85, 163–167.
Monnin, P. (2017). Monetary policy, macroprudential regulation and inequality (ECP, Discussion Note 2017/2).
Mumtaz, H., & Theophilopoulou, A. (2017). The impact of monetary policy on inequality in the UK. An empirical analysis. European Economic Review, 98, 410–423.CrossRef
O’farrell, R., Rawdanowicz, L., & Inaba, K. (2016). Monetary policy and inequality (OECD Economics Department Working Paper No. 1281). Paris: OECD Publishing.
Voinea, L., & Monnin, P. (2017). Inequality should matter for central banks.
Zdzienicka, A., Chen, S., Diaz Kalan, F., Laseen, S., & Svirydzenk, K. (2015). Effects of monetary and macroprudential policies on financial conditions: Evidence from the United States (IMF Working Paper 15/288).
Metadata
Title
Does the Income Inequality Channel Impact the Transmission of Monetary Policy Shocks to Economic Activity?
Authors
Eliphas Ndou
Thabo Mokoena
Copyright Year
2019
Book
Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty

Print ISBN: 978-3-030-19802-2

Electronic ISBN: 978-3-030-19803-9

Copyright Year: 2019

DOI
https://doi.org/10.1007/978-3-030-19803-9_4