Search the archive.

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

Inequality and inflation

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

Changes in the stance of monetary policy inevitably have some short-run distributional effects. Every time the central bank adjusts interest rates, changes its lending terms or purchases assets, distributional consequences follow. For example, any such adjustment redistributes interest income between debtors and creditors and influences asset prices, which reallocate income and wealth in the population depending on holdings (see Box II.C for a detailed analysis of this point). But the more important influence of monetary policy on inequality is through its impact on inflation, employment and economic activity. These are the main macroeconomic factors that shape inequality over the business cycle.

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

Trade-offs between actions aimed at achieving monetary policy objectives over different horizons have always been present. But changes in the nature of the business cycle since the mid-1980s have complicated the monetary policy task of keeping the economy on an even keel and exacerbated those trade-offs. As a result, the impact on inequality has also become more complex. The root cause has been a shift from recessions mainly induced by a monetary policy tightening to keep inflation under control to recessions in which financial factors play a key role in amplifying business cycle fluctuations, ie the financial recessions noted above.20 The shift is illustrated in Graph II.10, which covers a sample of AEs. Until the mid-1980s, in response to a rise in inflation (left-hand panel), the central bank would tighten policy considerably in the lead-up to the recession (centre panel), while nothing much would happen to credit – here measured by the deviation of the credit-to-GDP ratio (right-hand panel) from its long-term trend. Since the mid1980s, by contrast, with inflation lower and more stable, monetary policy has not tightened much, but a major expansion of credit has given way to a subsequent sharp contraction, inducing a stronger and more prolonged monetary easing. This explains why measures of the financial cycle, or those of “froth” in credit markets, have become more useful for predicting turns in the business cycle. For instance, debt service ratios that are well above historical averages are a drag on GDP growth and signal a likely recession ahead.21

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

Inequality and recessions

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

Beyond 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

Finally, while our results tend to support the critics who argue that QE did increase inequality, there is nothing in our analysis which supports those who argue that raising interest rates will have a desirable, equalizing impact. Tighter monetary policy would likely reduce employment growth, and make mortgage refinancing more expensive. While it might reduce asset price growth and raise returns on short term assets, the employment and refinancing impacts are likely to be dominant as earlier work on monetary policy and income distribution has demonstrated (e.g. Coibion et al., 2012).

Calvin He and Gianni La Cava, “The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets,” Research Discussion Paper, Reserve Bank of Australia, February 2020, https://www.rba.gov.au/publications/rdp/2020/2020-02.html

The differential effects of monetary policy changes on housing prices appear to be temporary. The differences across all price deciles becomes statistically insignificant beyond two years. These spatial deviations in prices are indicative of housing market frictions, as price differentials should not be observed in efficient markets. These frictions could reflect transaction costs, home bias of buyers or asymmetric information. However, the temporary nature of the price differentials suggest that the frictions dissipate over time.22

Tim Worstall, “Inequality Is Not the Fed’s Priority,” The New York Times, 10-27-14, https://www.nytimes.com/roomfordebate/2014/10/27/what-could-the-fed-do-to-address-inequality/inequality-is-not-the-feds-priority

The Fed does have a regulatory role in banking, so it could at least try to intervene in such areas as small business lending, risky investment and bank involvement in derivatives. But split authority in this area means that could also fall, dependent upon the bank and or the product, under the remit of the C.F.T.C., F.D.I.C., O.C.C. and numerous other agencies that make up the alphabet soup of the regulatory structure. The Fed's bully pulpit is therefore powerful – its direct regulatory control of the system less so.

Julien Albertini, Güneş Kamber, and Michael Kirker, “Estimated Small Open Economy Model With Frictional Unemployment,” Pacific Economic Review, Vol. 17, Iss. 2, Pg. 326-353, 5-17-12, https://onlinelibrary.wiley.com/doi/10.1111/j.1468-0106.2012.00585.x

6. Dynamics of unemployment and vacancies

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

Bullard acknowledged that it’s not easy reaching consensus on the issue of interest rates.

Tim Worstall, “Inequality Is Not the Fed’s Priority,” The New York Times, 10-27-14, https://www.nytimes.com/roomfordebate/2014/10/27/what-could-the-fed-do-to-address-inequality/inequality-is-not-the-feds-priority

There's very little in the monetary toolbox of a central banker that can affect inequality. True, quantitative easing and low interest rates are great for those who own assets, as they can soar in value. But the Fed is doing that to try to stop the economy from worsening, which would be bad for rich and poor alike. The impact on inequality is a very second, even third, order effect. Other than that, there's not really a great deal that the Fed can do about it.

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/

Beyond this, however, central banks’ job should remain the imposing task of maintaining price stability and financial stability in the interest of maximising public welfare. The fair and efficient distribution of economic resources is a public good and central banks’ growing interest in discussing and reporting on inequality is a positive development that should be encouraged. But central bank policy is no substitute for effective social security, shock adjustment assistance and financial market regulation.

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

Conclusion

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

This suggests a paradox. Given the current structure of the economy and monetary policy strategies, both loose and tight monetary policy are likely to be disequalizing. Future research should focus on better understanding the reason for this paradoxical situation. It is likely that more direct tools of monetary policy are needed. Perhaps more importantly, fiscal policy, and labor market policies such as changes in labor laws, tax laws, and minimum wage legislation will be needed to reduce the massive levels of inequality that we are experiencing today.

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

***Note: this report distinguishes between “governments” in charge of fiscal policy and “central banks” in charge of monetary policy***

“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

What is the biggest challenge faced by small businesses today? Surprisingly the answer is not high taxes—it is professional licensing requirements.

Thumbtack, a business services firm, in partnership with the Ewing Marion Kauffman

The pandemic may have forever supercharged America's entrepreneurial spirit.

Americans filed 5.1 million new business applications in 2022, according to US Census Bureau data, equating to roughly 14,000 new business applications filed every day last year. It marked the second-highest year on record — down slightly from 5.4 million in 2021 — and remained well above the 3.5 million filed in 2019.