Policy Impact

Distribution of Income

Monetary policy is not used directly to affect the performance of the Australian economy in regards to the distribution of income. However, any change in the monetary policy stance will undoubtedly have a significant impact on the standard of living for many Australians, and as such the impact on this goal can not be discounted.

We have already discovered that a change in the cash rate will flow through the economy to affect both the unemployment rate and the rate of inflation. When the unemployment rate falls, we know that the distribution of factor income becomes more equitable. As factor income will generally exceed transfer income, the overall distribution of income can then be said to be more equitable. During the last decade, the manipulation of monetary policy has been effective in helping to maintain a consistent decline of the rate of unemployment in Australia despite a growing workforce.

Similarly, any increase in the rate of inflation will have a significant impact on those receiving fixed or low incomes. In times of rising prices, these people will find that they are unable to satisfy as many of their needs and wants. As such, although the actual amount of income received may not change, the ability of that income to satisfy our needs and wants will. The goal of an equitable distribution of income can not be said to be being achieved when an increased number of people are unable to satisfy their basic needs.

However, when discussing the impact of monetary policy on the distribution of income in Australia, it is very important to keep two things in mind. First, any increase in the cash rate does not necessarily lead to a more inequitable distribution. Many students mistakenly think that as a higher percentage of our income will now be spent repaying loans, the distribution is somehow more inequitable. A change in the cash rate will affect our discretionary income, and this is not measured by any statistical body. Also, people on higher incomes are far more likely to have loans.

Secondly, many students assume that there is no relationship between monetary policy and the distribution of income. Although it is difficult to measure the exact impact that any change in the cash rate will have, do not forget that one of the charter goals of the RBA is to increase the living standards of all Australians. This suggests that an inequitable distribution of income is highly undesirable, and as such that RBA will not make decisions that will lead to a less equitable distribution.

Current Page: Distribution of Income