Monetary policy can influence income inequality and wealth distribution through its effects on interest rates, asset prices, and economic activity. Interest Rates Borrowing and Saving: Lower interest rates reduce borrowing costs, benefiting those with access to credit, often higher-income individualRead more
Monetary policy can influence income inequality and wealth distribution through its effects on interest rates, asset prices, and economic activity.
Interest Rates
- Borrowing and Saving: Lower interest rates reduce borrowing costs, benefiting those with access to credit, often higher-income individuals and businesses. Meanwhile, savers, who are typically middle or lower-income, earn less on their savings.
- Debt Burden: Lower rates can reduce debt burdens, freeing up income for consumption or investment, primarily benefiting those who already have debt.
Asset Prices
- Stock Market and Real Estate: Expansionary monetary policy, like lowering interest rates, often boosts asset prices such as stocks and real estate. Wealthier individuals, who are more likely to own these assets, experience greater increases in wealth.
Economic Activity
- Employment and Wages: Lower interest rates can stimulate economic activity, potentially leading to job creation and wage increases. However, the benefits might not be evenly distributed, often favouring higher-skilled workers more.
Overall, while monetary policy can support economic growth, it can also exacerbate income and wealth inequality by disproportionately benefiting those with greater access to financial assets and credit.
See less
Monetary policy may be quite effective in influencing income distribution and wealth distribution by a change in interest rates, asset prices and even employment rates. If an economy is scaled by the Central Bank with the help of declining interest rates, then wealthy people benefit the most.Read more
Monetary policy may be quite effective in influencing income distribution and wealth distribution by a change in interest rates, asset prices and even employment rates.
If an economy is scaled by the Central Bank with the help of declining interest rates, then wealthy people benefit the most. This is so because, with lower rates, borrowing becomes cheaper and thus, investors invest more in things like stocks, real estate, and other assets, which, are expected to rise in value. Owners of such assets experience an upward social mobility and a widening of the social disparity. On the other hand, possibly, small investors, who have less money invested, will not immediately notice such advantages.
While the dampening effect of expansionary monetary policy or an increase in the interest rate to tame inflation may prove particularly lethal to lower-income earners, not to mention perhaps restricted credit due to high cost of borrowing, measures put in place to control inflation may slow down job creation, especially in areas where low wage earners work.
In conclusion, monetary policy works in the general economy, and it deepens income and wealth inequality since its winners are the high-income earners while its losers are the low-income earners.
See less