Monetary Policy and Income Inequality
Pierre Monnin, a Fellow at the Council on Economic Policies, has prepared an insightful and practical solution to present at the upcoming GES session: Monetary Policy and Income Inequality. We look forward to hosting a thoughtful and inspired conversation between himself, Edward Lazear and Joseph Stiglitz on Sunday, September 7th in Kuala Lumpur.
Central Bank Reporting on Distributive Effects – Central Banks Should Report Regularly on the Distributive Effects of Their Policies
There is growing evidence that monetary policy is not neutral for income and wealth distribution. Coibion et al. (2012), for example, show that, in the United States, contractionary monetary policy systematically increases inequality in labor earnings and total income. The Bank of England (2012) estimates that 40% of the wealth increase resulting from its recent asset purchase program benefited the top 5% wealthiest households in the United Kingdom. Saiki and Frost (2014) find that the unconventional monetary policy pursued by the Bank of Japan after 2008 also widened income inequality. Wong (2014) demonstrates that monetary policy creates intergenerational inequality and presents evidence that contractionary monetary policy increases inequality between young and old households in the United States. Monnin (2014) shows a U-shape relationship between inflation and inequality where rising inflation correlates with falling inequality until a certain threshold and with increasing inequality thereafter. Finally, Brunnermeier and Sannikov (2012) argue that monetary policy can help reduce inequality after an adverse shock, thereby stabilizing the economy and stimulating growth.
In addition, higher inequality, whether generated by monetary policy or other factors, is not without importance for central banks’ policies. Ostry and al. (2014), for example, find that higher inequality is robustly correlated with slower and less durable growth. Kumhof et al. (2013) point out that rising income inequality, combined with high household debt, can trigger financial and real crises. Both outcomes are a cause for concern for central banks with potentially significant impacts on their transmission mechanisms as well as price and financial stability.
Consequently, the need for more detailed analysis of the potential distributive effects of central banks’ decisions are moving up the agenda in public debates, and central bank officials are more and more often publicly questioned on that issue. In September 2013, for example, Ben Bernanke, chairman of the Federal Reserve at that time, was asked to assess Fed policy in terms of its distributive effects during the press conference following the Federal Open Market Committee meeting (Federal Reserve, 2013).
Against this background, it is important that central banks communicate regularly and formally on the distributive effects of their policies. We therefore suggest that central banks publish a dedicated chapter on the topic in at least one of their key reports annually and that they address the distributive impact of their policies in other communication channels (e.g. press conferences, hearings, speeches). This would foster an informed public debate on the topic. It would also provide an impulse for researchers to generate knowledge and deepen our understanding of the key distributive impacts of monetary policy and the channels issue through which they unfold.
Bank of England (2012). “The Distributional Effects of Asset Purchases”, Quarterly Bulletin, 2012 Q3, 254-266.
Brunnermeier, M. and Sannikov, Y. (2012). “Redistributive Monetary Policy”, Jackson Hole 2012 Economic Policy Symposium.
Coibion, O., Gorodnichenko, Y., Kueng, L. and Silvia, J. (2012). “Innocent Bystanders? Monetary Policy and Inequality in the U.S.”, NBER Working Paper, no. 18170.
Federal Reserve (2013). Transcript of Chairman Bernanke’s Press Conference, September 18, 2013.
Kumhof, M., Rancière, R. and Winant, P. (2013). “Inequality, Leverage and Crises”, IMF Working Paper, WP/13/249.
Monnin, P. (2014). “Inflation and Income Inequality in Developed Economies, CEP Working Paper, 2014/1.
Ostry, J., Berg, A. and Tsangarides, C. (2014). “Redistribution, Inequality and Growth”, IMF Staff Discussion Note, 14/2.
Saiki, A. and Frost, J. (2014). “Does Unconventional Monetary Policy Affect Inequality? Evidence from Japan”, CEP Working Paper, 2014-2, forthcoming.
Wong, A. (2014). “Population Aging and the Aggregate Effects of Monetary Policy”, MPRA Paper, no. 57096.