An Analysis of the Effects of Monetary Policy on Income Inequality in Canada

Abstract

Income inequality is becoming a more pressing issue in today’s society. Many economists and policymakers are studying the trends of income inequality and the factors that are contributing to these trends. One factor in particular that has seen a rise in popularity as a potential contributor to income inequality, is the monetary policies that are put in place by central banks. The purpose of this paper is to determine the effect specific monetary policies implemented by the Bank of Canada have on income inequality among its citizens. By using household survey data from Statistics Canada for the years 1996 – 2017, three series of fixed-effects models were created, with each using a different income inequality measure as the dependent variable and using specific economic variables, to serve as proxies for the different kinds of monetary policies, as explanatory variables. These regression models were also run in the period before the Global Financial Crisis, from 1996 – 2008, and in the period after the Global Financial Crisis, from 2009 – 2017. After running these regressions and analyzing the results, I conclude that monetary policy has a more statistically significant effect on female inequality measures than it does on male inequality measures, even though the effects seem to be similar in value. I also find that expansionary monetary policy had an increasing effect on income inequality in the period before the Global Financial Crisis, but a decreasing effect on income inequality in the period afterwards. Additionally, the results show that for conventional monetary policy in the form of altering the interest rate, it has a decreasing effect on income inequality before the Global Financial Crisis, and either an increasing or decreasing effect afterwards depending on the inequality measure being observed. Lastly, it is found that unconventional monetary policy in the form of asset management by the Bank of Canada, has a slightly stronger effect on income inequality in the period after the Global Financial Crisis.