Should central banks do something about inequality and, if so, what? This has become a hot topic, which has persuaded the Bank for International Settlements to focus on it in its latest annual report. Its conclusions are what one would expect: monetary policy is neither the main cause of inequality nor a cure for it. Broadly speaking, this is correct. But in a world in which central bankers have become such aggressive actors, it may not be enough.
A striking fact noted by the BIS is that since what it calls the “Great Financial Crisis”, the proportion of speeches by central bankers mentioning inequality has soared. This partly reflects rising political concern about inequality. But it also reflects a specific critique. This is, in the report’s words, that “central banks have deployed policies featuring exceptionally low interest rates and extensive use of balance sheets to support economic activity and lower unemployment. Such measures have fuelled concerns that central banks’ actions, by boosting asset prices, have benefited mostly the rich”. That critique is popular among conservatives who detest activist central banks. (See charts.)
Yet there is also an opposite critique from people who upbraid central banks for not being activist enough. People in this camp argue that the failure has been to be too passive, letting inflation remain too low and labour markets stay too weak. At present, central banks, even the European Central Bank, are far closer to this position than to the more conservative one. Central banks, one might assert, have become more than a little “woke”.
This is an important debate, bearing on the legitimacy and consequences of what central banks are doing, especially in this era of crises. The view of the BIS itself is threefold. First, the rise in inequality since 1980 is “largely due to structural factors, well outside the reach of monetary policy, and is best addressed by fiscal and structural policies”. Second, by fulfilling their monetary mandates, central banks can reduce the impact of shorter-term shocks to economic welfare caused by inflation, financial crises and, no doubt, real shocks (such as pandemics). Finally, central banks can also do something about inequality with good prudential regulation, promoting financial development and inclusion and ensuring safe and effective payments.
All this is sensible, so far as it goes. It is clear, for example, that falling real interest rates and easy monetary policies have tended to raise asset prices, to the benefit of the wealthiest. But, interestingly, the measured impact on wealth inequality has not been as dramatic as one might have expected. More important, it would have made no sense to adopt a deliberately more restrictive monetary policy solely in order to lower asset prices. This would have reduced activity and raised unemployment….
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