Wealth and income inequality in a monetary economy

In contrast to the standard aggregate monetary model which suggests that money growth is super-neutral in the long run with respect to real aggregate quantities, we find that the super-neutrality of money does not extend to inequality measures. Two alternative scenarios to illustrate the impact of money on inequality are considered, enabling us to identify the channels whereby monetary policy impacts various inequality measures. Three striking results emerge from the formal model. First, the effects of money growth on income inequality and wealth inequality contrast sharply. Second, money growth impacts the long-run distribution of capital only as long as it accompanies some other real shock, such as an increase in productivity. Third, the flexibility of labor supply is critical in determining the distributional consequences of monetary policy. The model is sufficiently flexible to reconcile the mixed empirical data on the correlation between inflation and inequality.