Monetary policy and the distribution of income in a transfer theory of debt

Abstract

Monetary policy is widely supposed to work by varying the redistribution of income from debtors to creditors. However, the impact of monetary policy is not the same along the yield curve, and not all borrowers can borrow at all maturities. Central banks can also affect the distribution of interest income through their open market operations. Monetary policy therefore has complex effects in which the respective distributions of credit and debt, as well as the absolute level of interest rates, affect the distribution of interest income. With government debt the incidence of taxation has to off-set any regressive effects of such debt. Ultimately, fiscal policy, rather than monetary policy, has a more direct impact on the distribution of income.