Redistributional Effects of Monetary Policy Inflation targeting is not a neutral pareto improvement Any choice of target redistributes from some groups to others making some worse off For example high inflation harms holders of fixed rate debt including pensioneers holders of fixed income securities employees with protected jobs and annuity like compensation including most government employees and policy makers and most tenured academics and creditors It benefits net debtors particularly if they have fixed rate debt or debt with interest rate caps It also benefits owners of commodities real estate foreign currencies equity in export oriented firms local employees in trade sensitive and offshoring capable sectors and the unemployed Low inflation benefits holders of fixed rate debt business that export to the target country importers employees who gain from offshoring retired people on fixed pensions and people with protected annuity like wages academics government employees and policy makers Low inflation therefore tends to favor rentiers increasing their wealth by boosting the purchasing power of their assets and transfers wealth away from debtors owners of real estate owners of commodities local import sensitive businesses and the insecurely employed In theory this could be corrected restoring its neutrality and Pareto improvement however transaction costs moral hazard information asymmetry and political resistance would make such wealth transfers grossly impractical To the extent that Monetary policy creates a known and predictable transfer of wealth between a priori known counterparties it is not a neutral economic tool and can not be divorced from political considerations and preferred constituencies Furthermore such constituencies will try to influence choice of monetary policy targets rentiers creditors and pensioners will prefer tight monetary policy debtors will prefer looser monetary policy as will exporters and other participants in internationally tradeable sectors of the economy owners of commodities and real estate and the precariously employed If redistribution of wealth via such mechanisms has differential efficiency impact and impacts the network of business formation and production within and between trading nations some monetary policy targets may also move an economy away from an efficient frontier Moral Hazard of Monetary Policy Making Agents From a principal agent perspective monetary policy makers face a personal moral hazard since their compensation typically takes the form of a secure fixed annuity This would incentivize them to favor tight monetary policy even at the expense of lower real GDP growth Compensation schemes that made their personal wealth inversely related to the unemployment rate would create a moral hazard in favor of overly loose monetary policy Compensation schemes that made their personal wealth contingent on real GDP growth may be more efficient by reducing their overall moral hazard