Monetary policy, inflation, and income inequality in developing countries

This study investigates the relationship between income inequality and monetary policy in developing countries using a balanced panel dataset of 25 countries from 2000 and 2022. The analysis explores how contractionary and expansionary monetary policies, along with inflation, influence income distribution. The findings reveal that both contractionary and expansionary monetary policies have an effect on income inequality. The study emphasizes the adverse impact of high interest rates on lower and middle-income groups, as it widens income inequality and benefits the top income group. Similarly, high inflation erodes income shares for most deciles but the wealthiest, who can leverage asset appreciation and price-setting power. Additionally, the study highlights the redistributive role of government spending and public investments, which positively impact income shares across all deciles except the top 10%.