Has growth in the money supply since 1971 led to increased inequality?
At the beginning of the 1970s, two major changes occurred to the global macroeconomy. The Bretton Woods exchange rate system was discarded, bringing in a period of increased inflation and structurally higher monetary and credit growth, and the decades long trend of reduced income inequality in developed economies was reversed. This thesis puts forward the hypothesis that these two events are related and that there are monetary policy roots to the increased income inequality that evolved in the five decades since. Underpinned by Wicksell’s theory of inflation as a cumulative process and on the theories that money is non-neutral and that it is endogenous and results from credit extension, this thesis uses a systems thinking approach to put forward a number of testable causal hypotheses, concerning the distributional effects of inflation and credit growth, to be analysed empirically using Granger and kernel causality tests. Based on the results of these tests, a multivariate panel regression model is built to gauge the significance of the selected independent variables on inequality. Results show that inflation was a major driver of inequality in developed countries during the 1971-2016 period, and that investment returns, particularly in housing, also contributed to the trend. Additionally, evidence suggests that the increased weight of mortgage credit in gross domestic product may act as a channel through which inflation leads to inequality.
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