Does Inflation-targeting Policies Worsen Income Inequality in its Trading Partner?

Shrimoyee Ganguly and Rajat Acharyya

Foreign Trade Review, 2026, vol. 61, issue 3, 263-291

Abstract: Interest rate hike as an instrument for inflation-targeting has been adopted quite aggressively in recent times by the Fed Bank of the United States, which has some far-reaching implications for emerging market economies like India. In such a context, this article explores implications of interest rate hike by a large foreign country for wage inequality between skilled and unskilled workers in a domestic economy. We focus on the supply side channel: hike in foreign interest rate affecting wage inequality through its impact on domestic investment, capital formation and consequent changes in the composition of aggregate output. We show that the wage inequality worsens if capital-cost share in a composite traded good is larger than the capital-cost share in a skill-based export-good Z . Domestic policies such as credit expansion by changing the cash-reserve ratio and increase in money supply help mitigate this worsening wage-inequality effect of interest hike abroad. This issue assumes relevance because of rising concerns among the major central banks the world over about the income distributional impacts of monetary policies, whereas most of the recent income inequality trends seem to have been contributed largely by rising skill premiums. JEL Codes: E52, F41, F11, E24

Keywords: Inflation-targeting; cash-reserve ratio; money supply; exchange rate; wage inequality (search for similar items in EconPapers)
Date: 2026
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://journals.sagepub.com/doi/10.1177/00157325241264346 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sae:fortra:v:61:y:2026:i:3:p:263-291

DOI: 10.1177/00157325241264346

Access Statistics for this article

More articles in Foreign Trade Review
Bibliographic data for series maintained by SAGE Publications ().