Financial development and the redistributive channel of monetary policy

Johnson Ahiadorme

Studies in Economics and Finance, 2022, vol. 39, issue 2, 279-296

Abstract: Purpose - This paper aims to examine the distributional channel of monetary policy (MP) and evaluate how financial development (FD) affects the transmission mechanism from MP to income inequality. Design/methodology/approach - The empirical investigation is implemented for 32 sub-Saharan African countries over the period 2000–2017, with the aid of vector autoregressions and a dynamic panel data model. Findings - This study shows that MP has a significant impact on income inequality and the financial system plays an important role by dampening the dis-equalising effects of MP shocks. Both MP and FD directly exert redistributive effects. However, the financial system appears to wield the greatest impact and contribute more to the inequality dynamics. Practical implications - The policy-relevant conclusion is that the financial system is crucial for the monetary transmission mechanism and the effects of MP actions. As the economy develops financially, it may require less movement in the policy position to achieve the desired policy outcome. Also, macroeconomic stabilisation policies may not be distributionally neutral and may have a role to play in averting longer-term increases in inequality. Originality/value - Contrary to previous studies, this study indicates MP by the structural shocks to purge the MP stance of the issues of endogenous and anticipatory actions. A distinctive finding of this paper is that cross-country differences in monetary regimes and income explain a significant variation in the distributional impacts of monetary policy. Notwithstanding, the evidence shows that the strength of the transmission is more dependent on FD than the nature of the policy regime.

Keywords: Monetary policy; Financial development; Income inequality; Sub-Saharan Africa (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-03-2021-0104

DOI: 10.1108/SEF-03-2021-0104

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