1. Introduction

The book delves in these issues and shows that policymakers did not indicate the possible existence of the policy ineffectiveness theory nor did they indicate whether policy ineffectiveness could be dependent on whether inflation is above or below the current threshold of six per cent. It is possible that monetary policy may be a conduit in transmitting shocks to income inequality and be a driver of income inequality. The effectiveness of monetary policy may become distorted by income inequality. These are examined in detail in the book from various angles. The policy ineffectiveness theory suggests that demand management policies are ineffective. In this setting, new classical economics suggests that policy interventions should not exist because inflation is costlier than unemployment. In addition, the short-run Philips curve is very steep, and the economy is self-correcting, and this works smoothly and quickly. In contrast, the new Keynesian theory suggests that policy interventions are needed, because unemployment is costlier than inflation. In this case, the Philips curve is flat. However, the self-correcting mechanism is rather slow and unreliable. Does the theory of policy ineffectiveness hold in South Africa and is this constrained by inflation regimes?

Some channels through which inequality leads to adverse economic reaction include increased leveraging and financial cycle, which precipitate financial crises (Rajan 2011).

However, other justifications have been pointed out in the literature. Theory suggests that inflation has direct effects on income inequality through various channels, including changes in real valuation of financial and nonfinancial assets (Bulir 2001). Whereas Romer and Romer (1999) put forward that high inflation can create expectations of future macroeconomic instability and lead to distortionary economic policies which may impact on inequality.

The findings in this empirical undertaking should not be viewed as advocating for monetary policy to be used to solve income inequality problems in South Africa.

During a period of high inflation, prices are less rigid.

The new classical economics suggests that policy intervention should not exist because inflation is costlier than unemployment; the short-run Philips curve is very steep; and the economy is self-correcting and it works smoothly and quickly. In contrast, the new Keynesian theory suggests that policy interventions, because unemployment is costlier than inflation, the Philips curve is flat, and that the self-correcting mechanism is rather slow and unreliable.

Their work differed from that of Ball et al. (1988) by allowing for differential effects of monetary policy and government spending. They test the new Keynesian proposition that sticky prices increase the effects of government spending and monetary policy on gross national product. They found little evidence of the new Keynesian sticky price model.

Bernanke (1983).

Excess capital adequacy ratio above minimum required.