Monetary policy, and incidence

[jake williams]

Hi,

I tried very briefly to Google this, with so little success I gave up almost immediately. I'm looking for empirical research, ideally in some detail, on the incidence effects of monetary policy on different groups: different sectors of business, and business vs. workers. I've been listening to a lot of right-wing libertarians lately, the ones obsessed with the Fed, and the ones who talk about the "inflation tax". It's partly a silly propaganda phrase, but in principle, it's not false. But it does raise the obvious question - a tax on whom, and what are its effects?

I can make a lot of assumptions about what they might be, depending on the situation, but it would be interesting to see any actual research.

Thanks.

[Vladimir Innit Lenin]

Inflation in theory affects everyone equally, but obviously 5% inflation (tax, if you will) eating into someone who earns £20,000 per year will hurt a lot more than for someone who earns £100,000+ per year and has money stashed in the bank. The money in the bank won't be affected so much by inflation, if you follow.

I have some figures for Real Income Growth, can't link to the tables because it's on my university account, but it's from the Family Expenditures Survey and Family Resources Survey, and the data is as such:

Average annual income growth, per quintile (lowest first):
1st quintile: 0.85%
2nd quintile: 1.1%
3rd quintile: 1.55%
4th quintile: 1.95%
5th quintile: 2.5%

^^for the period 1979-1997. So it's not independent of other variables, and unfortunately it doesn't isolate the period 1979-1990 when inflation was at its most volatile, where the income disparity would almost certainly have been greater, but it gives you an idea of how uneven the distribution was when inflation was generally higher.

The same data shows that for the period 1997-2008, when inflation was generally low and stable, all income groups' income grew between 1.5% and 2.0%, a relatively equal distribution, though yes, the lowest quintile still grew slowest and inequality (As measured by the Gini Coefficient) still grew under the New Labour years.

[Vladimir Innit Lenin]

Also a decent article which explains things more in laymens terms:

http://www.bdo.uk.com/press/talk-shop/spending-power-eroded-triple-effect-

And note how bad things are for workers - he is forecasting a tough time in 2011 with a forecast inflation rate of 3.9%, when we know that inflation is around 4.5% at the moment.

[jake williams]

Inflation in theory affects everyone equally, but obviously 5% inflation (tax, if you will) eating into someone who earns £20,000 per year will hurt a lot more than for someone who earns £100,000+ per year and has money stashed in the bank. The money in the bank won't be affected so much by inflation, if you follow.
In principle, but I can't think of a policy situation where that would actually be the case.

So, for example, it's been argued that banks with access to central bank funds do a lot better than institutions or individuals that don't when central bank rates are low. There's also the question of incidence effects if inflation comes from government borrowing - who is the government spending on when they borrow? One could also imagine a situation where inflation came from a high statutory minimum wage. I think it's clear here that it would be largely workers who benefit, at least some workers, but really I don't know much in detail about any of these, which is why I'm asking.

There's also the difference between objective effects and subjective effects. Let's say person A starts with $200 000 in the bank but has no other income, and person B starts with nothing but starts off making $10 000 a year. If there is high inflation, and a negative real interest rate, and wages track inflation, person B probably loses some purchasing power year by year, but person A loses a lot of purchasing power. Person A might still be better off, but they've lost a lot in inflation. Person B may not have lost as much.

[Vladimir Innit Lenin]

In your example, higher inflation would probably (unless we are in a stagflation scenario, but that is not normal) be reflected by higher interest rates, and so person B would not in fact lose out so much. Of course it is an extreme situation you pose, so they would still lose out comparatively. I cannot think of an example where there would be high inflation and a negative interest rate. Even currently in the UK, where we are fairly close to a stagflationary scenario, inflation is not crazily high (I mean, it's above the BoE target but 4.5% is not historically high nor a terminal threat to living standards) and interest rates are not negative.

As Socialists, though, we need to understand that we should be encouraging people not to save extortionate amounts of money. The only reason people (aside from greed) should need to have tens of thousands stashed away is for housing. The abolition of private property would solve this economic problem, and so really we should strongly advise people to ideally not have £200,000 in their bank accounts. It is wasted capital and gives the banks more power to leverage risky financial positions.

[Vladimir Innit Lenin]

Also, if you have full access to JSTOR (luckily I do with uni) then try this:

http://www.jstor.org/pss/1927386