Monetary Policy and the Well-Being of the Poor.

Poverty is arguably the most pressing economic problem of our time. And because rising inequality, for a given level of income, leads to greater poverty, the distribution of income is also a central concern. At the same time, monetary policy is one of the modern age's most potent tools for managing the economy. Given the importance of poverty' and the influence of monetary policy, it is natural to ask if monetary policy can be used as a tool to help the poor.

It is this possibility that we pursue in this paper. We examine the influence of monetary policy on poverty and inequality both over the business cycle in the United States and over the longer run in a large sample of countries. Our analysis suggests that there are indeed important links between monetary policy and the well-being of the poor in both the short run and the long run, but that the short-run and long-run relationships go in opposite directions. Expansionary monetary policy aimed at rapid output growth is associated with improved conditions for the poor in the short run, but prudent monetary policy aimed at low inflation and steady output growth is associated with enhanced well-being of the poor in the long run.

The existing literature on monetary policy and the poor focuses almost exclusively on the short run. Monetary policy cart affect output, unemployment, and inflation in the short run. As a result, if poverty and inequality respond to these variables, monetary policy can affect the well-being of the poor. Furthermore, because unanticipated inflation can redistribute wealth from creditors to debtors, monetary policy can also affect distribution through this channel.

In the first section of the paper, we provide some up-to-date estimates, of the cyclical behavior of poverty and inequality. We confirm the common finding that poverty falls when unemployment falls. In contrast to earlier authors, however, we find no evidence of important effects of cyclical movements in unemployment on the distribution of income. We find some evidence that unanticipated inflation narrows the income distribution, though we can detect no noticeable impact on poverty. Finally, using the Federal Reserve's Survey of Consumer Finances, we find that the potential redistributive effects of unanticipated inflation on the poor through capital gains and losses are very small.