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Title: Monetary policy, inequality and financial markets
Author: Nwafor, Chioma Ngozi
ISNI:       0000 0004 5356 4467
Awarding Body: University of Glasgow
Current Institution: University of Glasgow
Date of Award: 2015
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This thesis examines the reaction of monetary policy to income inequality and the effect of asset price changes and financial sector development on income inequality. The actions of monetary authorities in the U.S and elsewhere during the financial crisis period have had a major impact on financial markets. Given that financial asset prices respond quickly to new information about monetary policy shifts, the Fed’s low interest rate policy stance that started in August 2007 led to a significant increase in asset prices, particularly stock prices. Stock prices appreciation transfers wealth to those households who already own stocks; generally speaking, the wealthier American households. Consequently, it is important to examine empirically the dynamics of monetary policy, asset prices and financial development on income inequality. First, we examined the response of monetary policy to income inequality. We tried to provide empirical answers to the following questions; is there any evidence that monetary policy responds to income inequality? If there is evidence of such a response, what is the nature symmetric or asymmetric? Secondly, is there any significant relationship between changes in stock prices and income inequality? Thirdly, what are the implications of financial sector development on income inequality? This area of literature draws from monetary economics, financial economics and welfare economics disciplines, and has become increasingly important given the massive levels of income inequality that is witnessed around the world. Chapter 2 of this thesis looks at the reaction of monetary policy to income inequality using data from the U.S. We provided evidence of a positive and significant reaction of monetary policy to income inequality measured using the income share accruing to the top 1 percent income earners. We also found evidence of asymmetric reaction of monetary policy to the income of the top 1 percent between 1960 and 2009. In chapter 3 we focused on the role of asset prices on income inequality using data from the U.S. We found that stock market developments and income of the top 1 percent wage earners are well integrated with the direction of causality running from stock returns to top 1 percent income share. One of the practical policy implications of this finding is that monetary policy stance that is directed towards the propping up of asset prices will have a concomitant effect on the income of the top 1 percent income earners. Also in chapter 3 we used the Generalized Methods of Moment GMM to examine the reaction of inequality measured using the income share of the top 1 percent, the bottom 90 percent and the lowest fifth percent households to changes in asset prices. Our task here is to examine whether changes in both financial and nonfinancial assets affects everyone in the top and bottom of the income distribution the same way, or if there are remarkable differences on how these variables affect individuals within the top and bottom income percentiles. Our results detected widespread and subtle effects of asset prices on income at the selected percentiles of the income distribution. These findings hold practical implications for policy makers because the distribution of stocks and homes has important consequences on who benefits from asset prices appreciation and who is hurt by its depreciation. Finally in chapter 4 we analysed the distributional consequences of financial sector development on income inequality using a large unbalanced dataset of 91 countries, classified according to World Bank’s income categories. The results in almost all the models suggested that increasing access to credit for households will reduce income inequality. This finding is important in the light of the potential for using financial development as a policy tool to reduce the widening income inequality around the world.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: H Social Sciences (General) ; HG Finance