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.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Aiyagari, S.R.: Uninisured idiosyncratic risk and aggregate saving. Q. J. Econ. 109, 659–684 (1994)
Albanesi, S.: Inflation and inequality. J. Monet. Econ. 54, 1088–1114 (2007)
Atolia, M., Chatterjee, S., Turnovsky, S.J.: Growth and inequality: dependence on the time path of productivity increases (and other structural changes). J. Econ. Dyn. Control 36, 331–348 (2012)
Bewley, T.F.: Stationary monetary equilibrium with a continuum of independently fluctuating consumers. In: Hildenbrand, W., Mas-Collel, A. (eds.) Contributions in Mathematical Economics in Honor of Gerard Debreu, North-Holland, Amsterdam (1987)
Camera, G., Chien, Y.: Understanding the distributional impact of long-run inflation. J. Money Credit Bank. 46, 1137–1170 (2014)
Caselli, F., Ventura, J.: A representative theory of distribution. Am. Econ. Rev. 90, 909–926 (2000)
Chang, J.-J., Lin, H.-Y., Savitski, D.W., Tsai, H.-F.: Inflation and inequality in a growing economy with cash and credit goods. Macroecon. Dyn. (2020) (forthcoming)
Chatterjee, S.: Transitional dynamics and the distribution of wealth in a neoclassical growth model. J. Public Econ. 54, 97–119 (1994)
Coibion, O., Gorodnichenko, Y., Kueng, L., Silva, J.: Innocent bystanders? Monetary policy and inequality. J. Monet. Econ. 88, 70–89 (2017)
Coronado, J.L., Perozek, M.: Wealth effects and the consumption of leisure: retirement decisions during the stock market boom of the 1990s, Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series, 2003–20 (2003)
Danthine, J.-P., Donaldson, J.B., Smith, L.: On the superneutrality of money in a stochastic dynamic macroeconomic model. J. Monet. Econ. 20, 475–499 (1987)
Doepke, M., Schneider, M.: Inflation and the redistribution of nominal wealth. J. Polit. Econ. 114, 1079–1097 (2006)
Fischer, S.: Capital accumulation on the transition path in a monetary optimizing model. Econometrica 47, 1433–1439 (1979)
Gabaix, X., Lasry, J.-M., Lions, P.-L., Moll, B.: The dynamics of inequality. Econometrica 84, 2071–2111 (2016)
Garcia-Peñalosa, C., Turnovsky, S.J.: Taxation and income distribution dynamics in a neoclassical growth model. J. Money Credit Bank. 43, 1543–1577 (2011)
Geweke, J.F.: The Superneutrality of money in the United States: an interpretation of the evidence. Econometrica 54, 1–21 (1986)
Gorman, W.M.: Separable utility and aggregation. Econometrica 27, 469–481 (1959)
Heathcote, J.K., Storesletten, and G.L. Violante, : Quantitative macroeconomics with heterogeneous households. Annu. Rev. Econ. 1, 319–354 (2009)
Holtz-Eakin, D., Joulfaian, D., Rosen, H.S.: The Carnegie conjecture: some empirical evidence. Q. J. Econ. 108, 413–435 (1993)
Kaplan, G., Moll, B., Violante, G.L.: Monetary policy according to HANK. Am. Econ. Rev. 108, 697–743 (2018)
King, R.G., Watson, M.W.: Testing long-run neutrality. Fed. Reserve Bank Richmond Econ. q. 83(3), 69–101 (1997)
Kormendi, R.C., Meguire, P.G.: Cross-regime evidence of macroeconomic rationality. J. Polit. Econ. 92, 875–908 (1984)
MaCurdy, T.: An empirical model of labor supply in a life cycle setting. J. Polit. Econ. 89, 1059–1085 (1981)
Maliar, L., Maliar, S.: The representative consumer in the neoclassical growth model with idiosyncratic shocks. Rev. Econ. Dyn. 6, 362–380 (2003)
Marini, G., van der Ploeg, F.: Monetary and fiscal policy in an optimizing model with capital accumulation and finite lives. Economic Journal 98, 772–786 (1988)
Meyer, B.D., Sullivan, X.: Consumption and income inequality and the Great Recession. Am. Econ. Rev. Papers Proc. 103, 176–183 (2013)
Mundell, R.A.: Inflation and real interest. J. Polit. Econ. 71, 280–283 (1963)
Ragot, X.: The case for financial approach to money demand. J. Monet. Econ. 62, 94–107 (2014)
Romer, C.D., Romer, D.H.: Monetary policy and the well-being of the poor. Fed. Reserve Bank Kansas City Econ. Rev. First Quart. 84, 21–49 (1999)
Serletis, A., Koustas, Z.: International evidence on the neutrality of money. J. Money Credit Bank. 30, 1–25 (1998)
Sidrauski, M.: Rational choice and pattern of growth in a monetary economy. Am. Econ. Rev. 57, 534–544 (1967)
Sorger, G.: On the long-run distribution of capital in the Ramsey model. J. Econ. Theory 105, 226–243 (2002)
Thalassinos, E., Uğurlu, E., Muratoğlu, Y.: Income inequality and inflation in the EU. Eur. Res. Stud. 15, 127–140 (2012)
Tobin, J.: Money and economic growth. Econometrica 33, 671–684 (1965)
Turnovsky, S.J., Garcia-Peñalosa, C.: Distributional dynamics in a neoclassical growth model: the role of elastic labor supply. J. Econ. Dyn. Control 32, 1399–1431 (2008)
Weil, P.: Is money net wealth? Int. Econ. Rev. 32, 37–53 (1981)
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
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.
Supplementary Information
Below is the link to the electronic supplementary material.
Rights and permissions
About this article
Cite this article
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
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s40505-021-00207-x