Monetary Policy and Interest rate Volatility – The Role of Inequality and Imperfect Credit Market

Sugata Marjit, Suryaprakash Mishra, Sanghita Mandal and Mayukh Basu

No 12556, CESifo Working Paper Series from CESifo

Abstract: Inequality of wealth or liquid finance in a system with credit market imperfection adversely affects investment by poor investors. This is well known in the literature. In this paper we prove that the aggregate credit demand function would be relatively inelastic with unequal wealth distribution as the average borrowing cost would be greater for people with lower endowment of self-owned capital. Hence, the supply side impact of monetary policy would have different impact on the rate of interest in markets with different degrees of inequality as measured by the elasticity of credit demand. Volatility of interest rate would be higher with greater inequality. For similar types of monetary policy, attaining policy targets would be relatively difficult in such markets.

Keywords: inequality; monetary policy; capital flows; credit market (search for similar items in EconPapers)
JEL-codes: D63 E43 E51 E52 F21 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12556

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