The aim of this paper is to investigate empirically the effects of monetary policy on poverty and income distribution in Iran using the data over the period 1976-2005. Monetary policy is one of the most potent instruments for managing the economy. There is a useful question to ask if the monetary policy is used as an instrument to reduce poverty. Most of the existing literature on monetary policy and poverty focuses on the short run. Monetary policy affects most of the macroeconomic variables such as output, unemployment, and inflation. Moreover, anticipated inflation and unanticipated inflation redistribute differently income from creditors to debtors. If poverty and inequality respond to these macroeconomic variables, monetary policy affects the well-being of the poor.
The findings of this study show that monetary policy cannot be used as a poverty alleviation policy in Iran, since the expansionary monetary policy followed commonly by expansionary fiscal policy results in a rise in budget deficits. This policy increases the aggregate demand for all the goods and services in the economy resulting in higher inflation. Furthermore, there is no significant link between monetary policy and investment through interest rate. Consequently, monetary policy has no supply side effects in the economy and just it increases inflation rate. As a result of expansionary monetary policy, the poor would find its real income being gradually eroded by the growth in money supply, and hence the possibility of running into poverty.