Monetary Policy and Income Distribution in a Multisectoral AB-SFC Model

Matheus Trotta Vianna

Review of Political Economy, 2024, vol. 36, issue 3, 1019-1041

Abstract: Restrictive monetary policy can not only fail to achieve the conventional macroeconomic goal of controlling inflation but also be seen as responsible for the increasing income inequality that has occurred in recent decades. This result is not clear, however, if one remains bounded to the traditional monetary policy transmission mechanisms and conventional models. In this article, we create an agent-based, stock-flow consistent, heterodox disequilibrium model to analyse and evaluate the effects of different basic interest rate levels, especially its distributive effects. Using computer simulations, we show that the basic interest rate plays a key role when firms compete in oligopolistic markets and face financial constraints and costs. In such circumstances, increases in the interest rate can be responsible for price increases, creating the price puzzle problem. In addition, it forces redistribution of income in favour of the financial system and pressures the profit rate of industrial firms, which will raise prices and lower the wage share. The final distributive effect of an interest rate policy will ultimately depend on the power of these agents: the bargaining power of the workers to claim higher wages and the market power of the firms to raise prices.

Date: 2024
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DOI: 10.1080/09538259.2024.2339005

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