Monetary policy and inequality: Investigation of relationships for Turkey

This paper, examines the relationship between income inequality and monetary policy shocks by using income inequality indicators in Turkey. The main purpose of the study is to investigate whether the monetary shocks has an effect on income inequality, and if effect's present, to find out whether this effect occurs through financial channels or real channels. In order to empirically test the relationship between monetary policy and income inequality, following Uhlig (2005), structural vector autoregression model (SVAR) and vector autoregression model (VAR), were used. In order to investigate the effects of shocks on income inequality IRF's were used. The gini coefficient and 90/10 ratios were used alternatively as income inequality variables. According to our findings, contractionary monetary policy shocks increase income inequality in short run, but income inequality gives a cyclical response in medium run. After a contractionary shock, income inequality firstly increases, but after a while it decreases. Secondly, real channels work more dominantly than financial channels in terms of the effect of monetary policy has on income inequality. Thirdly, the middle class is more affected by monetary policy actions than the high-income class