publish2017-10-23 4:25 pm

How Monetary Policy Impacts Income Inequality ?

monetary policy impact

Monetary policy affects each one of the country citizens. During the last three decades the  G8 and G20, which are the group of nations that is formed by the biggest and most developed global economies have addressed how monetary policy impacts income inequality. They have joined with the International Monetary Fund and the World Bank to find the most efficient way to apply effective macroeconomic measures or a monetary policy with high impacts on income inequality to reduce the ever-growing gap between the top 10% financial rich and the rest of the working population.

How Monetary Policy Impacts Income Inequality on interest rate

a) Lowering the interest rate promotes the jobs creation and decreases the unemployment rate. The new jobs created tend to have payment higher than the minimum wage with increase the purchasing power of the worker class. A higher purchasing power decreases the income inequality.

b) Lowering the interest rate increases the credit offer and the general public access to money loans or credits. A low interest rate facilitates the goods acquisition by offering credit on any sale. Additionally, the ability to pay any good in fractions or overtime improves the economically deprived population access to necessary products. Being able to get credit a low cost or with low interest rate produces a positive impact of the monetary policy on decreasing income inequality.

c) A low interest rate has a negative impact on the long-term on Income Inequality. Because the wealthy persons and big corporations will get credits at very low cost, which will be used to make investments and generate a more significant money wealth. It would increase the Income Inequality or economic gap between the top 10% of economy upper class and the rest of the population.

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How Monetary Policy Impacts Income Inequality on Inflation

Inflation tends to decrease the gap between the rich and the poor since the money value is reduced and those with high balance bank’s accounts will lose its facing value partially. Inflation decreases the income inequality in short periods. The decrease in income inequality is more prominent on the unexpected than in the expected inflation. Unexpected inflation tends to reduce the money purchasing power of the top economic class sharply. However, even though, the economic gap is dramatically reduced during high or hyperinflation states, the economy most vulnerable sector suffer the most, and the upper class can tolerate it better thanks to their real estates and other investment, which will adjust is monetary value during it.

How Monetary Policy Impacts Income Inequality on Tax and Devaluation

The idea of imposing higher taxes on the higher earning households and provide a tax relief and government financial help to those economically deprived have been used in several European Union Countries. It is a partially effective measure to reduce income inequality. The tax relief have improved the access to some essential goods and increase the net income of the economic lower level class. However, this monetary policy fails to address the ever-growing inequality in labor income, which is responsible for up to three-quarters of the income inequality among the working age.

Devaluation monetary policy impacts income inequality the worst, which impoverishes of  the general population, It reduces the Income Inequality by making most of the people miserable or by reducing the financial support the people used to have.

How Monetary Policy Impacts Income Inequality is a controversial topic with have been studied by the developed countries in a hope to find the best way to decrease the gap on Income Inequality, at the moment there is not a clear economy policy that solve the income inequality.

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