AT Monetary Policy CPs - Georgetown 2023 Starter

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Aff Key
2AC---Perm Do Both/Aff Key
Monetary policy fails absent the plan’s intervention to solve inequality
BIS 21 – Bank for International Settlements
“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
Beyond a certain point, inequality across households may weaken the transmission of monetary policy. Households at the bottom and at the very top of the income distribution exhibit low sensitivity of consumption to changes in interest rates: the former may be unable to take advantage of easier credit conditions due to tight borrowing constraints, while the latter have a low propensity to increase their already high consumption.16 By contrast, households at the bottom of the income distribution have higher marginal propensity to consume, and hence are more sensitive to changes in their disposable income.
Empirical evidence suggests that inequality tends to dampen the transmission of monetary policy (Graph II.9). Across countries and time, consumption responds less to an unanticipated monetary policy easing when income inequality is greater – here measured by the share of income accruing to the top 10% of earners. Two years after such an easing, the cumulative difference in consumption growth between a country at the first and the third quartiles of the income inequality measure is estimated to be 0.8 percentage points. This empirical result complements theoretical findings in the recent academic literature, which highlight the importance of household characteristics as a determinant of the transmission of monetary policy to economic activity (Box II.B).
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More broadly, inequality may influence central bank decisions by shaping the political economy environment. Growing inequality can make the public less receptive to central bank actions perceived to increase it. This can constrain the central bank’s choices and eventually hamper its ability to achieve its mandated goals. For example, out of concerns about the impact of higher asset prices on wealth inequality, the central bank could come under criticism for keeping interest rates very low for long periods as it tries to engineer the needed recovery in the wake of a financial recession.
1AR---Perm Do Both/Aff Key
Perm solves best---monetary policy is ineffective absent fiscal interventions
Ravenna and Walsh 09 – Department of Economics, University of California, Santa Cruz, and Federal Reserve Bank of San Francisco
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.
At the same time, while the cost of the search inefficiency is large, the welfare attained by the optimal policy deviates very little from the one achieved under flexible prices. In practice, the policymaker finds little incentive in trying to correct for the search inefficiency, and to deviate from a policy of price stability. Monetary policy is of limited effectiveness because it works through the retail sector markup, which simultaneously affects all of the distortions present in the economy, and because Nash bargaining implies low volatility of employment. In this sense, our result is the welfare implication of the Shimer’s (2004) puzzle. Yet, introducing real wage rigidity does not, in itself, modify this result. This is in stark contrast with models including staggered wage and price contracts (Erceg, Henderson and Levin, 2000, Thomas, 2008). It is only with a wage norm fixed at a level very different from the efficient steady state that deviations from price stability yield high return in terms of welfare, and the trade-off faced by the policymaker can be favorably exploited to increase search efficiency. In this case, there exist gains from accounting for the labor market’s structure in selecting monetary policy, even without introducing an explicit cost of wage dispersion. Additionally, in our model the hours margin plays a minor role in the welfare results. We conjecture that the explicit introduction of overtime labor would change this result.
Monetary policy interacts in complex way with fiscal and labor market policies. We find that the welfare gain of deviation from price stability is larger, the more volatile are labor market flows over the business cycle. Higher firing and hiring costs, as in the EU, make price stability a relatively closer approximation to the optimal policy. The same labor market characteristics that lower steady-state employment, and leave more to be gained from long-term policy intervention, make cyclical monetary policy less effective. How fiscal and monetary policies should coordinate once the distortions from the financing of taxes and subsidies is taken into account is a question left open for future research.
Monetary policy alone is insufficient
BIS 21 – Bank for International Settlements
“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf
Macroeconomic stability
While monetary policy plays a key role in promoting macroeconomic stability, it cannot deliver it on its own. This is true regardless of the nature of the business cycle. It is well known, for instance, that fiscal sustainability is a prerequisite for macroeconomic stability, and that it can be especially constraining in EMEs (Chapter I). But changes in the nature of the business cycle have brought the limits of what monetary policy can do into starker relief. In order to better understand the need for complementary policies, consider a stylised business cycle associated with a financial recession.
2AC---Monetary Policy Fails
Only fiscal policy can solve
BIS 21 – Bank for International Settlements
“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***
Structural inequality
Addressing the structural trends in inequality is first and foremost a task for governments. They can avail themselves of a better and broader set of tools to tackle inequality, ranging from taxation to transfers as well as to policies aimed at improving education, property rights, health, competition and trade, among others. Moreover, politically, governments bear the responsibility for achieving a desirable distribution of resources.
Fiscal policy is best suited to offset the distributional impact of long-term real factors. Government spending and support programmes, such as unemployment benefits and retraining, can help the most disadvantaged cope with adverse structural forces. More generally, tax and transfer systems can be calibrated and targeted to redistribute income and wealth across different segments of the population (Box II.E). In AEs, such policies have indeed contributed to mitigating income inequality. Measures of income inequality based on the Gini coefficient are typically much higher pre- than post-taxes and transfers (Graph II.11, left-hand panel). The difference is more limited in EMEs (right-hand panel), one possible reason being the lower share of direct taxes in those jurisdictions.
1AR---Monetary Policy Fails
Only fiscal policy can solve---any change to monetary policy is disequalizing
Montecino and Epstein 17 – Department of Economics, UMass Amherst; Department of Economics and Political Economy Research Institute (PERI), UMass Amherst
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.
Given monetary policy’s inadequacy in addressing structural factors, the aff’s fiscal reform is key
BIS 21 – Bank for International Settlements
“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf
Conclusion
Inequality is largely the result of long-term structural forces that are independent of monetary policy. Over the past few decades, globalisation and technology have played a prominent role. Policies that foster more equal opportunities or redistribute income are best suited to counteract the impact of long-term forces on income and wealth inequality. Structural policies, including those targeted to education, health and competition, give the relatively poor of today the instruments to become the well-off of tomorrow, promoting social mobility and equitable growth. Fiscal policies, notably through redistribution, help correct the uneven distribution of the aggregate gains from growth.
Monetary policy does not have adequate tools to offset the long-term distributional consequences of evolving structural factors. Nevertheless, depending on statutory responsibilities, central banks can make a significant contribution by wearing their “non-monetary hats”, to an extent that depends on the tools available. Promoting financial development, inclusion and literacy, protecting against unfair financial practices, and furthering low-cost payment services all contribute to a more equitable society.
This is not to say that monetary policy cannot foster a more equitable society; far from it. Monetary policy can make an important contribution by keeping the economy on an even keel in fulfilment of its mandate, ie by tackling macroeconomic, including financial, instability. Macroeconomic instability can have a first-order impact on inequality over business cycle fluctuations. The two major forms of instability are high inflation, which disproportionately erodes income of households at the bottom of the distribution, and recessions, which hurt the poor through unemployment spells.
Changes in the nature of the business cycle over the recent decades have complicated monetary policy’s ability to counteract macroeconomic instability and its impact on inequality. To be sure, inflation has largely been conquered – a major achievement. But financial factors have come to the fore as a key force amplifying business cycle fluctuations. Financial recessions tend to be deeper and longer, especially if a financial crisis breaks out, and therefore much more costly in terms of inequality. Moreover, they require the central bank to keep interest rates low for longer to nurture a recovery: by boosting asset prices, especially those of equities, this may raise wealth inequality in the short run even as it delivers substantial benefits by bolstering employment and reducing income inequality. The intertemporal trade-offs that arise pose a key challenge. With inflation less responsive to economic slack, the central bank can keep the monetary policy stance easier for longer. This brings more people into the labour force, supports employment and reduces inequality. But it may also contribute to a slow build-up of financial imbalances that sow the seeds of costlier financial recessions down the road.
In order to better address these trade-offs, a more balanced policy approach is needed. Prudential, fiscal and structural policies are important in this context, as part of a comprehensive macro-financial stability framework.
Even advocates of the counterplan agree
Jacobs 23 – Economist at the Official Monetary and Financial Institutions Forum
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.
Solvency
2AC---Can’t Solve Inequality
The Fed can’t influence inequality
Worstall 14 – senior fellow at the Adam Smith Institute
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.
1AR---Can’t Solve Inequality
There is no consensus on whether the counterplan even moves in the right direction
Vereckey 21 – editor, citing James Bullard, president and CEO of the Federal Reserve Bank of St. Louis
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.
“Are the low interest rates helping poor people, or are low interest rates helping rich people? I think we need to get clarity on which one is it,” he said. “There's a powerful argument on both sides. We need models that will help disentangle that.”
2AC---Can’t Solve Unemployment
Monetary policy fails---the labor market is disconnected from macroeconomic policy
Albertini et al. 12 – University of Every; Reserve Bank of New Zealand; Reserve Bank of New Zealand
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
In the previous section, we show that our model provides a fairly good description of macroeconomic and labour market variables in New Zealand. In this section, our objective is to use our structural model to investigate which shocks are the drivers of unemployment and vacancies in New Zealand. To do so, we analyze the variance decomposition of unemployment and vacancies.
7, 8 present the variance decomposition of vacancies and unemployment. The model is driven by 11 structural shocks. Three of these shocks are directly related to the labour market of the model; namely, the matching efficiency shock, the bargaining power shock and the vacancy posting cost shock. In 7, 8, while we detail the contribution of labour market shocks to the fluctuations in unemployment and vacancies, we group together the contribution of all the other shocks. An inspection of 7, 8 makes it clear that the bulk of variation in both series is due to the disturbances pertaining to the labour market. In particular, most of the variation in unemployment is due to shocks to matching efficiency (which is in line with the results of Krause et al., 2008a in a closed economy model), while most of the variation in vacancies is due to the vacancy posting cost shock. All the other shocks, foreign, domestic and policy, play only a marginal role in explaining cyclical variations in these two key labour market variables.
2AC---AT: Fed Regulations
Split authority overwhelms the Fed’s regulations
Worstall 14 – senior fellow at the Adam Smith Institute
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.
2AC---AT: Rates Affect Housing Prices
Inequality effects on housing prices are only temporary
He and Cava 20 – research economist at the Reserve Bank of Australia, Bachelor of Economics and Commerce at University of New South Wales; lead of the Micro Analysis and Data research team at the Reserve Bank of Australia, PhD in Economics from the London School of Economics
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
2AC---AT: High Rates Good
Raising interest rates also increases inequality
Montecino and Epstein 17 – Department of Economics, UMass Amherst; Department of Economics and Political Economy Research Institute (PERI), UMass Amherst
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).
Offense
2AC---Stability Trade-Off
The counterplan ruins the flexibility and effectiveness of monetary policy---ensures economic instability and turns inequality
BI

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