Economic Research and Perspectives

Economic Research and Perspectives

Income Inequality and Its Implications for the Central Bank’s Asset Portfolio

Authors
Mahla Afsharpour 1
Seyed Abdolmajid Jalaei 2
Hossein Akbarifard 3
Mehdi Nejati 4
1 Ph. D. Candidate, Department of Economic Sciences, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Iran
2 Professor, Department of Economic Sciences, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Iran
3 Associate Professor, Department of Economic Sciences, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Iran
4 Associate Professor, Department of Economic Sciences, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Iran.
10.48311/ecor.2025.24059
Abstract
Economic inequality remains one of the most pressing challenges facing contemporary societies, particularly in developing countries, where it can undermine both social cohesion and economic stability. This study investigates the impact of income disparity on the demand for physical and non-physical assets held by central banks. Specifically, it explores whether unequal income and wealth distribution influence demand for such assets. The research comprises two phases: first, a systematic review of the existing literature on economic inequality and central bank asset demand establishes the study’s theoretical foundation. Second, empirical analysis is conducted to identify patterns in how inequality affects demand for physical assets, such as gold and foreign currency reserves, and non-physical assets, such as securities. Based on these findings, the study provides recommendations for central bank policies aimed at more effective resource management and the reduction of inequality.
 
Aim and Introduction:
Economic inequality is a significant challenge in contemporary societies, particularly in developing economies, where it threatens the stability of social and economic institutions. This study investigates the impact of income disparity on the demand for physical and non-physical assets held by the central bank, seeking to determine whether unequal income and wealth distribution affect demand patterns for these assets.
The research unfolds in two phases. First, a systematic review of the literature on economic inequality and central bank asset demand provides the theoretical context. Second, a data-driven analysis examines how inequality influences demand for physical assets (e.g., gold, foreign currency reserves) and non-physical assets (e.g., securities). The study concludes with policy recommendations for central banks aimed at optimizing asset allocation and mitigating economic inequality.
Findings:
This study evaluates the capacity of the central banks to influence income inequality and examines how disparity affects demand for different asset classes. Statistical tests reveal that the null hypotheses of equal slope coefficients and symmetry among income deciles are rejected at the 5% significance level, indicating complex, nonlinear relationships between income levels and asset demand.
At lower income levels, increases in income correspond to heightened demand for U.S. dollars; however, this effect reverses at higher income levels. The Gini coefficient also exhibits heterogeneous effects across income deciles—rising inequality increases demand in some deciles while reducing it in others. Income becomes statistically significant only in higher income deciles, positively influencing the demand for British pounds. However, as income disparity widens, demand for pounds may decline.
Regarding the Chinese yuan, income significantly affects demand only in the sixth to ninth deciles. In these groups, higher income levels are associated with increased demand for yuan. Conversely, in the fourth to sixth deciles, the yuan’s exchange rate negatively influences demand. The Gini coefficient is significant in most income deciles, further illustrating the multifaceted effects of inequality. The euro exchange rate is also significant in most deciles (except the ninth), exerting a stronger negative effect at higher income levels. Interest rates are significant only in the first through third deciles, where they negatively affect euro demand.
For the Swiss franc, income coefficients are generally positive and significant, suggesting that income growth increases demand for francs. However, a negative effect is observed in the ninth decile, potentially due to heightened inequality. The Gini coefficient is significant across all deciles, indicating that inequality tends to reduce demand at lower income levels while increasing it at higher ones.
The Japanese yen’s coefficient is significant across all deciles. Increases in the yen’s exchange rate typically reduce demand, except at higher income levels, where positive effects are observed. Rising income decreases demand for yen at lower income levels, increases it at middle levels, and decreases it again at higher levels. Additionally, the global price of gold positively affects yen demand.
Income disparity also affects demand for debt securities. The price of
gold significantly influences demand for these instruments, particularly in the seventh to ninth deciles, suggesting that higher gold prices prompt investment diversification.
Demand for money is significantly influenced by income and interest rates across all deciles. Generally, rising income increases money demand, but in higher income deciles, income declines are associated with reduced demand. The Gini coefficient becomes significant from the second decile onward, indicating that individuals in higher-income groups tend to hold more liquidity in response to inequality.
Conclusion:
Income inequality, especially in developing countries such as Iran, poses a fundamental challenge, contributing to uneven wealth distribution, social dissatisfaction, and potential economic crises. As the principal institution of monetary policy, the central bank plays a critical role in mitigating these disparities. Using data from 1971 to 2023 and employing quantile regression analysis, this study examines how demand for central bank assets—including currency, gold, money, and securities—interacts with income inequality in Iran.
The findings demonstrate that foreign reserves, gold, and securities serve as vital instruments for strengthening the financial system and managing liquidity. However, income inequality produces differential effects on asset demand. For example, at lower income levels, demand for foreign reserves and gold rises, while at higher levels, it declines.
To address these dynamics, the central bank can reduce inequality through interest rate adjustments, improved access to credit, and inflation control. Collaboration with the government to identify economic and social priorities and to increase public awareness is also essential. Ultimately, integrating equitable income distribution into economic policymaking is crucial for sustainable development and enhanced public welfare.
Keywords
Assets
Central Bank
Demand
Inequality
Quantile Regression

Subjects

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