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“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf

Macroeconomic stability

Federico Ravenna and Carl E. Walsh, “The Welfare Consequences of Monetary Policy and the Role of the Labor Market: a Tax Interpretation,” Federal Reserve Bank of San Francisco, April 2009, https://www.frbsf.org/economic-research/publications/working-papers/2009/12/

Our results can be summarized as follows. In our model, it is feasible for monetary policy to completely undo the price setting restriction. However, because the incentive to search responds to movements in the markup, but not to movements in nominal variables, we find that the policymaker can achieve higher welfare in the economy with staggered price setting rather than in one where price setting is unconstrained and one of the distortions relative to the first best is absent.

“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf

The impact of inequality on the transmission of monetary policy

Juan Antonio Montecino and Gerald Epstein, “Did Quantitative Easing Increase Income Inequality?” Publisher, 4-24-17, https://www.cepweb.org/wp-content/uploads/2017/11/Montecino-paper.pdf

These dis-equalizing impacts were due to both policy choices and deep seated structural problems. Policy wise, the Federal Reserve and Treasury Department did not design effective mechanisms to clear away obstacles for lower income households to refinance loans at lower rates. As Bair (2012) and Barofsky (2012) show, helping underwater homeowners refinance their mortgages or stay in their homes was not a top priority of the Treasury Department. Nor did the Federal Reserve try to implement any regulatory programs to do so. In addition, the Federal Reserve did not try to develop innovative programs to use its lending facilities to lend directly to state and local governments or others who would preserve or expand employment. This direct lending could have lessened the Fed’s dependence on bidding up asset prices in an attempt to generate employment and wage increases.

“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf

Similarly, sustaining a recovery in the aftermath of a severe economic recession requires keeping interest rates low for longer, especially if they are constrained by the effective lower bound.18 For example, had monetary policy refrained from deploying all necessary tools to keep borrowing costs low in the aftermath of the GFC and the Covid-19 pandemic, the recessions would have been deeper and longer. This, in turn, would have exposed the most disadvantaged to longer unemployment spells and worsened income inequality.19 That said, while low interest rates mitigate income inequality substantially, their impact on asset prices, especially equities, may have the side effect of increasing wealth inequality in the near term. This outcome, however, is not a given and may be overturned for certain measures of inequality if home ownership is concentrated in the middle of the wealth distribution (Box II.C).

“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf

[[Begin Box II.C]]

John Hawkins, “Are low interest rates increasing inequality? No, says the world’s central bank,” The Conversation, 6-30-21, https://theconversation.com/are-low-interest-rates-increasing-inequality-no-says-the-worlds-central-bank-163480

Phillip Lowe, the governor of the Reserve Bank of Australia, gets many letters and emails from retirees complaining they can’t live on the interest from their savings when interest rates are so low.

“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf

[[Begin Box II.B]]

Douglas Elmendorf, “Using Fiscal and Monetary Policy to Reduce the Harmful Effects of Inequality,” Remarks delivered by Dean Douglas Elmendorf at Ten Big Ideas on Inequality, Harvard Kennedy School, 10-13-16, https://www.hks.harvard.edu/more/about-us/leadership-administration/offices-deans/deans-office/presentations-and-papers/using-fiscal-and-monetary-policy-to-reduce-the-harmful-effects-of-inequality

In sum, low unemployment has very important advantages for people who are lower on the economic and social ladder. Can we achieve low unemployment through monetary policy and fiscal policy without creating larger economic problems? Yes.

Julian Jacobs, “Should reducing inequality be a central bank mandate?” Official Monetary and Financial Institutions Forum, 1-27-23, https://www.omfif.org/2023/01/should-reducing-inequality-be-a-central-bank-mandate/

This does not mean that central banks should ignore economic inequality when implementing their monetary framework, however. Although equality objectives may be difficult to implement, increasing awareness of inequality is not.

“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf

Monetary policy stance and inequality

“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf

Inequality and the conduct of monetary policy

Alexandre Assemien, Loesse J. Esso, and Kouamé D. Kanga, “Can Monetary Policy Influence Employment? The case of West African States,” Revue d'économie politique (Vol. 129), 2019, pages 777-813, https://www.cairn.info/revue-d-economie-politique-2019-5-page-777.htm?ref=doi

The paper shows that the monetary policy of the central bank affects inflation, output, and employment. The job finding probability depends on the dynamics of the current and future level of employment. Monetary policy promotes employment, increases production, consumption, inflation and investment. Moreover, the real wage and the instantaneous probability of vacancy being filled decrease after the positive monetary shock. Finally, the labour market variables display heterogeneous responses by using different settings while this is not the case for macroeconomic variables. We find a lower reaction of the unemployment rate when the job separation or the bargaining power of firms is high. These results imply that the transmission of monetary policy depends on the labour market characteristics. The reaction of (un)employment, job find probability and the state of the vacant jobs has stronger impact on a more frictional labour market and when we increase (decrease) the bargaining power of workers (firms).

Alexandre Assemien, Loesse J. Esso, and Kouamé D. Kanga, “Can Monetary Policy Influence Employment? The case of West African States,” Revue d'économie politique (Vol. 129), 2019, pages 777-813, https://www.cairn.info/revue-d-economie-politique-2019-5-page-777.htm?ref=doi

Now, we examine how monetary policy may affect employment. Figures 1 and 2 report the responses of key variables to a positive monetary policy shock following different settings. In the first scenario (Figure 1), we use two different job separation rates (q varies form 0.283 to 0.400), while in the second scenario (Figure 2), we check the sensitivity of the main variables of the model by using different values of the bargaining power of firms (f varies from 0.5 to 0.8). We focus on these two parameters because the dynamics of the job find probability depends on the job separation rate (see equation [22]) and that of the wage depends on the bargaining power of firms (see equation [A.3.7].

Betsy Vereckey, “Should central banks address inequality? Experts weigh in,” MIT Sloan School of Management, 8-3-21, https://mitsloan.mit.edu/ideas-made-to-matter/should-central-banks-address-inequality-experts-weigh

Should central banks be proactive in partnering to help address inequality?

Will Daniel, “The 2022 economy is like a 4-engine airplane with only one that works—and most experts want to turn it off, top economist says,” Fortune, 8-27-22, https://fortune.com/2022/08/27/economy-four-engine-plane-inflation-employment-personal-consumption-william-spriggs/

“In essence, Powell is clearly stating that right now, fighting inflation is more important than supporting growth,” he said.

Yiyao Zhou, “Monetary Policy and Unemployment—A Study on the Relationship Exists in the United States,” Open Journal of Social Sciences, Vol. 9, No. 4, April 2021, https://www.scirp.org/journal/paperinformation.aspx?paperid=108692

5. Conclusion

Horst Feldmann, “Real Interest Rate and Labor Market Performance around the World,” Southern Economic Journal, Vol. 79, No. 3, January 2013, pp. 659-679, https://www.jstor.org/stable/23809689

7. Conclusion

Will Daniel, “The 2022 economy is like a 4-engine airplane with only one that works—and most experts want to turn it off, top economist says,” Fortune, 8-27-22, https://fortune.com/2022/08/27/economy-four-engine-plane-inflation-employment-personal-consumption-william-spriggs/

Federal Reserve officials have been playing hardball when it comes to inflation this year, arguing that the American economy is overheated and interest rate hikes are needed to achieve price stability.

Betsy Vereckey, “Should central banks address inequality? Experts weigh in,” MIT Sloan School of Management, 8-3-21, https://mitsloan.mit.edu/ideas-made-to-matter/should-central-banks-address-inequality-experts-weigh

Other panelists took a more expansive view. Olli Rehn, governor of the Bank of Finland, said that monetary policy should be used to stimulate economic activity and assist in saving and creating jobs, especially during times of crisis.