The counterplan ruins the flexibility and effectiveness of monetary policy---ensures economic instability and turns inequality

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

Beyond monetary policy

The previous analysis indicates that the best contribution monetary policy can make to a more equitable distribution of income and wealth is to deliver on its mandate – seeking to ensure macroeconomic stability, for which price and financial stability are prerequisites. By keeping the economy on an even keel, central banks facilitate sustainable growth. The benefits of doing so are first-order.

It would be unrealistic, and indeed counterproductive, to gear monetary policy more squarely towards tackling inequality. Monetary tools, by their very nature, act primarily on cyclical developments. That is why they are well suited to achieving macroeconomic stabilisation objectives. By contrast, a meaningful impact on slowmoving inequality trends would entail sustained application of the tools in particular ways. This would curtail the flexibility of monetary policy to stabilise the economy, potentially undermining the effectiveness of the monetary regime itself. This would be very costly, not least because the macroeconomic stability that those regimes can deliver is precisely what is most conducive to equitable income and wealth distributions.

With monetary policy playing a supportive role, other policies are, therefore, critical. Three types of policy deserve attention: those that complement monetary policy in delivering macroeconomic stability in the different phases of the business cycle; those that address structural inequality; and those that central banks can deploy in fulfilment of their non-monetary policy responsibilities.