Journal of Environmental Treatment Techniques  
2020, Volume 8, Issue 2, Pages: 589-596  
J. Environ. Treat. Tech.  
ISSN: 2309-1185  
Journal web link:  
Analyses the Effect of Monetary Policy Transmission  
on the Inequality in OECD Countries  
Mohammad Farajnezhad *, Suresh A/L Ramakrishnan , Mani Shehni Karam Zadeh  
Azman Hashim International Business school (AHIBS), Universiti Teknologi Malaysia, Jalan sultan Yahya Petra, 54100, Kuala Lumpur  
A.James Clarks School of Engineering, University of Maryland, College. Park, 1131 Glenn Martin Hall, College Park, MD 20742  
Received: 16/08/2019  
Accepted: 17/01/2019  
Published: 20/02/2020  
The aim of this article is to analyze the inequality impacts of monetary policy transmission in OECD countries’ economy from 2001 to  
017. Panel regression model has been applied for the hypotheses test. Information gathering has been based on the country's basic  
information, i.e the data required for research are generally derived from the library method, using the World Bank website. The econometric  
method used in this research, is Generalized Torque Method. Dependent variable Gini coefficient index is considered as an indicator of  
income inequality and independent variables of monetary transfer mechanisms include interest rates, liquidity, exchange rates, the gold price,  
the legal reserves of the central bank and the banks' debt to the central bank. The results show that the interest impact of monetary transfer  
mechanism at the Gini coefficient as an indifference index in OECD countries is positive and insignificant (probability is 0.18) with a  
coefficient of 0.004 and it shows that raising interest rates will increase the inequality in these countries. Additionally, the effect of the capital  
market on the inequality is also positive with a coefficient of 0.001 and a significant probability of 0.002. It shows the positive effect of bank  
deposits on income inequality.  
Keywords: Monetary Policy Transmission, Inequality, OECD countries  
intended profit for transferring the tax burden to depositors and  
borrowers. This will lead to a separate monetary mechanism  
which cannot be controlled easily by monetary authorities and  
decreases the performance range of the intended instrument to  
some extent (5).  
Suitable macroeconomic policies have different outlets on  
income distribution. Monetary policies and its transition  
mechanisms are among the most important parts of the impact on  
poverty and the distribution of income (1). The goals of the  
mechanism of monetary policy transmission are to grasp its aims,  
for instance, manageable economic growth and producing a stable  
price (2). The understanding of how monetary policy works and  
the way it impacts the economy is a key factor to stabilize multiple  
economic aspects (3). Monetary authorities have various  
instruments to implement the monetary policy. Generally  
speaking, these instruments are divided into two groups: direct  
and indirect or qualitative and quantitative (4). The effects of  
using each instrument in controlling the money stock and  
subsequently achieving the monetary policy goals are different.  
Indirect instruments of monetary policy are:  
- Rediscount rate: it controls the money supply indirectly. Its  
advantage is that its changes by the central bank can quickly be  
effective on the interest rate. Another advantage of this instrument  
is that it influences the power of banks in granting credit. Hence,  
its effects are more comprehensive than other instruments. At the  
same time, the use of this instrument can have side effects on the  
profit of commercial banks too.  
- Open market operations: it is an effective method to control  
money supply in countries that have developed securities and  
money markets. Flexibility in the degree of the central bank  
intervention in the money market, its period and developing the  
money market through demand increase, are some advantages of  
this instrument. Moreover, the exchanges in this field based on  
the predetermined market rate are voluntary and do not have tax  
effects, unlike the bank reserves ratio. But in the central bank  
state, it is the decision-maker just at the time of buying the  
securities. The use of this instrument helps control the credits  
which are granted by banks to people and institutions to some  
extent. Change in the commission of various bank operations is  
one of the effective methods to control the volume of granted  
credits by banks from the demand side.  
- Bank reserves ratio: it has lower flexibility than other  
monetary policy instruments and the use of it can lead to a  
disturbance in the banking system. For this reason, it is usually  
recommended to use this instrument for long-term fluctuations in  
the supply of money, not the short-term ones. Frequent changes  
in the above-mentioned ratio may encourage the banks to keep  
additional surplus to be able to neutralize monetary controls.  
Also, the banks lose one part of the interest of loan that is granted  
to the private sector by increasing of bank reserves ratio. Under  
such circumstances, the banks may take action to achieve the  
Determining the maximum profit has a considerable effect on  
Corresponding author: Mohammad Farajnezhad, Azman Hashim International Business school (AHIBS), Universiti Teknologi Malaysia,  
Jalan sultan Yahya Petra, 54100, Kuala Lumpur. E-mail:;  
Journal of Environmental Treatment Techniques  
2020, Volume 8, Issue 2, Pages: 589-596  
financial sources of the banking system and as a result the volume  
of their granted credits via its effects on savings and deposits of  
the private sector (6). Although direct control of credits can be  
effective in preventing extension of credit in the short-term it may  
have some expenses in terms of resource allocation. This is  
because determining the credit line decreases the competition  
among the banks in granting loans and facilities. Besides, credit  
rationing prevents free cash flow in the economy and decreases  
its efficiency. Determining the credit line due to not fulfilment of  
business opportunities can be led to the formation of markets that  
are not under control by the central bank.  
expanding wealth inequality with rising benefit of portfolio  
investments(19) and (20). However, several economists argue  
that this is for the larger public good, as the positive impacts of  
quantitative easing exceed the possible negative effects (19).  
According to Draghi (2015), advocated the quantitative easing  
systems maintaining that inequality would have been even greater  
in their lack. Besides, Bernanke (6) described that the Feds  
monetary policy supported economic growth and job creation,  
which favor mostly the middle class, but accepted that easy  
monetary policy increased asset prices, that are owned mainly by  
highest income households. Also, the study by Stiglitz (21)  
maintains that the method monetary policy has already been  
carried out