The Distributional Effects of Disinflationary Monetary Policy

Macroeconomists traditionally focus on the aggregate consequences of disinflationary monetary policy, not its distributional effects. This paper considers these distributional effects. The evidence indicates that contractionary monetary policy harms interest rate-sensitive industries by depressing output and employment and increasing the cost of capital. These industries are further hurt as declines in output and increases in the cost of capital reduce capital formation. The evidence also indicates that tight monetary policy in 1981-82 decimated the earnings of small firms. These earnings have remained at low levels since then. Finally, the evidence indicates that wealth holders are helped by contractionary monetary policy as interest rates increase and inflation declines. Before tightening monetary policy to pursue these benefits, however, policy makers should weigh carefully the damage that they will inflict on interest-sensitive sectors and small firms.