Exploring the Nexus between Monetary Policy and Income Inequality: A Global Perspective

Abstract

This article explores the complex relationship between monetary policy and income inequality from a global perspective, highlighting how central bank actions influence economic disparities across developed and developing countries. Traditionally viewed as neutral in distributional terms, monetary policy is increasingly recognized for its significant indirect effects on income and wealth inequality through multiple channels. These include asset price inflation, labor market dynamics, inflation taxation, and credit access. Expansionary policies such as low interest rates and quantitative easing (QE) tend to boost asset prices, disproportionately benefiting wealthier households with substantial financial portfolios, while contractionary policies may exacerbate unemployment and income losses among lower-income groups. The article examines empirical evidence from institutions like the IMF, ECB, and BIS, revealing that monetary tightening often raises inequality, whereas easing can reduce income disparities but widen wealth gaps. Case studies of the United States and the European Union illustrate how post 2008 unconventional monetary policies stabilized economies but contributed to rising wealth concentration. In emerging markets, monetary interventions interact with structural factors such as informal sectors and financial inclusion, producing varied outcomes. Theoretical frameworks, including New Keynesian and heterodox models, underscore the non-neutrality of monetary policy and the importance of household heterogeneity in transmission mechanisms. The article argues for a nuanced approach that integrates inequality considerations into monetary policy design, complemented by fiscal and macroprudential measures. As global economies face challenges from inflation, geopolitical tensions, and potential recessions, understanding the nexus between monetary policy and inequality is critical for crafting inclusive policies that promote sustainable growth and social cohesion. (Karimli, V.M., Sheydai, T.A., Simkiv, L.E. 2026).