# Conventional Monetary Policy and Income Inequality

In almost every textbook, it's stated that monetary policy is preferred to fiscal policy, since the latter is more politically difficult to implement due to smaller consensus on its redistributive effects. Monetary policy would not suffer, since it has no redistribution effect.

Has any empirical study ever tried to verify/assess this claim that Monetary Policy has not redistribution effect?

• I get the sense that the point isn't that monetary policy isn't redistributive, as it quite obviously is: relative to no change in rates, a rate cut will redistribute income from savers to borrowers, and a rate increase will have the opposite effect. Adding to this the fact that wealth and income are strongly correlated, it's likely redistributive across both dimensions. Instead, the point is that because central banks are (to an extent) independent of the political process, they don't have the problem of achieving consensus as one does when trying to pass a package of tax cuts and spending. – dismalscience Jun 30 '16 at 17:49
• @dismalscience I'm not sure I agree with you... being a saver or a borrower is not, IMO, an income class/level, with some possible exception some extreme case with credit constrains being dependent on income, etc. The reason why is that very easily a borrower can become a saver - if there are no constrains to that - and vice-versa. I think it could be considered redistributive if it did affect differently across savers (or borrowers). – An old man in the sea. Jun 30 '16 at 18:33
• @dismalscience An increase in the rate should increase equally, across all agents in the economy, their willingness to save. I'm not saying I agree with this last unredistributive property. I'm just explaining what I read – An old man in the sea. Jun 30 '16 at 18:34
• Theoretically, if the MPC is <1 as we generally imagine it is, those with higher incomes will have more savings. This holds up empirically, as shown in Dynan (2004) which states, "Estimated saving rates range from zero for the bottom quintile of the income distribution to more than 25 percent of income for the top quintile" (dartmouth.edu/~jskinner/documents/DynanKEDotheRich.pdf) or more recently, Saez (nber.org/papers/w20625). – dismalscience Jun 30 '16 at 18:46
• @dismalscience I agree. But I think I was trying to say something differently. If the MPC was dependent also on interest rates, and $\text{MPC}(\text{income}_\text{lvl},\Delta r)$ was not constant by varying the income level, then for sure it would be redistributive. – An old man in the sea. Jun 30 '16 at 18:58

Well, certainly you'll see literature saying it is possible to make monetary redistributive. This paper by Brunnermeier and Sannikov (2012), Redistributive Monetary Policy, says that deflation can cause redistributive effects in an economy, and that monetary policy can be used to correct that, but "shouldn't" be used as a redistributive tool beyond that correction.

In general, conventional monetary policy focuses primarily on the short end of the yield curve. Expectations about future policy indirectly affect the long end of the yield curve. Unconventional monetary policy directly targets the long end of the yield curve and prices of specific assets. All these measures can redistribute wealth across and within sectors.

Notice how they emphasize the unusual nature of monetary policy meant to create (anti-)redistribution.

This paper by Faust (1996), Whom can we trust to run the Fed? Theoretical support for the founders' views, shows that while generally any policy that affects inflation will create redistributive effects, it's better that the Federal Reserve control monetary policy to mitigate those effects rather than let policy be determined by voting, because of conflicts of interest that can arise from voting.

The final paper I'd like to present is by Romer and Romer (1998). Their main findings in their paper, Monetary Policy and the Well-Being of the Poor, is that expansionary monetary policy is better for the poor in the short run, but less so in the long run. Low inflation and stable aggregate demand growth is better for the long run, and that usually means tighter monetary policy.

So it seems that monetary policy can be redistributive very easily. Also consider that optimal monetary policy usually wishes for the nominal interest rate to be close to zero. What does that do for capital owners who want to borrow for investments? How does that change long run growth and affect income inequality? Characterizing that can be a bit nebulous.

Stiglitz has written extensively about how conventional monetary policy does affect inequality (for example, here). There are a multitude of channels by which MP affect inequality. To mention one of them, low interest rates lowers the return on savings of workers, whereas it generates a booming stock market (which benefit mostly top percentiles) due to the fall in the discount rate at which future profits are discounted.

For an empirical treatment of the question have a look at:

Känzig, D.R.(2015). Monetary Policy and Economic Inequality in the United States.