Monetary policy transmission and income inequality in Sub-Saharan Africa

This paper evaluates the monetary policy transmission and income inequality in Sub-Saharan Africa (SSA) countries. We find procyclical response of income inequality to unanticipated monetary easing in the last two decades. Countercyclical monetary measures may have been efficient, but they have been dis-equalising as well. Taking cognisance of the explanations of the earnings heterogeneity channel, this evidence signals high concentration of assets and resources, limited employment of labour and limited distributive capacity of the state in SSA countries. Economic outturns may have favoured chiefly, the top of the distribution - entrepreneurs and their profit margin. Three main channels distinguish the transmission of standard and non-standard monetary measures: the reaction in the stock market, the response of the exchange rate and the fiscal response. Unconventional monetary policies appear to rely more on wealth effects than conventional policy measures. Unexpected non-standard monetary easing depreciates the exchange rate while unanticipated conventional accommodative monetary action appreciates the currency. Fiscal transfers increase in reaction to expansionary unconventional monetary policy shock. In contrast, a surprised standard monetary expansion decreases fiscal distributions, an effect that appears to underscore the limited fiscal space and tax revenues in most developing and emerging economies. The evidence demonstrates that the fiscal reaction to monetary policy action is important to the overall transmission of monetary policy to macroeconomic aggregates. Instructively, we find that the inflation cost of countercyclical monetary measures is comparatively less severe for standard monetary measures than non-standard monetary actions.