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Wealth and income inequality in a monetary economy

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Abstract

In contrast to the standard aggregate monetary model which suggests that money growth is super-neutral in the long run with respect to real aggregate quantities, we find that the super-neutrality of money does not extend to inequality measures. Two alternative scenarios to illustrate the impact of money on inequality are considered, enabling us to identify the channels whereby monetary policy impacts various inequality measures. Three striking results emerge from the formal model. First, the effects of money growth on income inequality and wealth inequality contrast sharply. Second, money growth impacts the long-run distribution of capital only as long as it accompanies some other real shock, such as an increase in productivity. Third, the flexibility of labor supply is critical in determining the distributional consequences of monetary policy. The model is sufficiently flexible to reconcile the mixed empirical data on the correlation between inflation and inequality.

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Authors and Affiliations

  1. Faculty of Economics, Ritsumeikan University, 1-1-1, Noji-higashi, Kusatsu, Shiga, Japan

    Yoichi Gokan

  2. Department of Economics, University of Washington, Seattle, WA, 98l95-3330, USA

    Stephen J. Turnovsky

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  1. Yoichi Gokan
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  2. Stephen J. Turnovsky
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Correspondence to Stephen J. Turnovsky.

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This paper has benefited from seminar presentations at Kinki University, Kwansei Gakuin University and Osaka University as well as from presentation at the 2018 SAET conference in Taipei. We also thank Taro Fukui, Koichi Futagami, Kazuki Hiraga, Keiichi Hori, Takeshi Hoshikawa, Hirokazu Ishise, Akira Kamiguchi, Tetsu Kawakami, Kazuo Mino, Ryu-ichiro Murota, Masao Oda, Toshihiro Okada, and Katsunori Yamada for constructive and valuable suggestions. The editorial suggestions of an Associate Editor are also gratefully acknowledged. Yoichi Gokan would like to acknowledge the financial support from the JSPS KAKENHI Project (No.19K01564). Stephen Turnovsky wishes to acknowledge the Van Voorhis endowment at the University of Washington for its financial support. Much of the work on this paper was done while Yoichi Gokan was visiting the University of Washington.

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Gokan, Y., Turnovsky, S.J. Wealth and income inequality in a monetary economy. Econ Theory Bull 9, 225–245 (2021). https://doi.org/10.1007/s40505-021-00207-x

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  • DOI: https://doi.org/10.1007/s40505-021-00207-x

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