When Tightening Hurts: The Distributional Impact of Restrictive Monetary Policy in Emerging Markets

Mahamoudou Zore ()
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Mahamoudou Zore: LEDi - Laboratoire d'Economie de Dijon [Dijon] - UB - Université de Bourgogne - UBFC - Université Bourgogne Franche-Comté [COMUE]

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Abstract: This paper examines the causal effect of monetary policy on income inequality in emerging economies using a dynamic panel analysis with the Generalised Method of Moments (GMM), specifically the two-step GMM system estimator. The sample consists of 46 emerging economies from 2000 to 2018. The results indicate that tight monetary policies contribute to an increase in income inequality. It is important to note that these policies have a minimal impact on income distribution until the third year after their implementation, indicating a delayed effect on inequality. When considering the transmission channels, it is evident that inflation, exchange rates, and the percentage of credit granted as a proportion of GDP are effective tools for monetary policy to influence income distribution. The study's results are robust, as confirmed by sensitivity analyses that take into account changes in sample composition, time horizon and inequality measurement methods. Further, heterogeneity analysis highlights that the impact of these policies on inequality depends on a number of factors, including the level of labour income, the existence of social protection policies and the condition of the economy.

Keywords: Monetary policy; Income inequality; Emerging countries; Distributional effects; System GMM Estimator (search for similar items in EconPapers)
Date: 2025-03-23
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