This paper investigates monetary policy's influence on poverty and inequality in both the short run and the long run. We find that the short-run and long-run relationships go in opposite directions. The time-series evidence from the United States shows that a cyclical boom created by expansionary monetary policy is associated with improved conditions for the poor in the short run. The cross-section evidence from a large sample of countries, however, shows that low inflation and stable aggregate demand growth are associated with improved well-being of the poor in the long run. Both the short-run and long-run relationships are quantitatively large, statistically significant, and robust. But because the cyclical effects of monetary policy are inherently temporary, we conclude that monetary policy that aims at low inflation and stable aggregate demand is the most likely to permanently improve conditions for the poor.
*Published:
Income Inequality: Issues and Policy Options. Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 27-28, 1998.
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