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Symposium 2014

Monetary Policy and Income Inequality

The Challenge

Traditionally, income distribution and monetary policy have been considered separate issues. However, this view has recently been challenged. The last few decades saw rising income inequality and slow recoveries after recessions, especially in developed countries. It is well established that recessions are particularly painful for the poor. Poor households have low saving and wage income is their primary source of funds. As wage growth is suppressed during recessions, poor households have to lower consumption and/or incur more debt in order to sustain their previous consumption levels. In developing countries where financial markets are underdeveloped, the poor suffer more because they do not have access to credit. Slack labor markets because of low job creation and rising unemployment are the other two factors exacerbating the plight of the poor. Thus, recessions are an important reason for rising inequality.

The challenge faced by monetary policy-makers when dealing with growing inequality is how to stabilize output more effectively and reduce the burden on the poor. Banks extend credit to firms or individuals they judge credit worthy. Individual banks do not care whether the total sum of these claims is consistent with macroeconomic equilibrium and full employment. In other words, the interest rate used by individual banks does not imply that demand for loans equals supply. As the interest rate is used for purposes other than market clearing—it affects both the mix of borrowers and the actions they take—the price system may not maintain macroeconomic equilibrium either. Maintaining this equilibrium is the task of the central bank. The price system seems to be a highly unreliable control mechanism when economies are in a recession. It is probably more unreliable in developing countries, where credit markets are underdeveloped and conditions are constantly changing. Thus, traditional monetary policy which uses the interest rate to affect lending and aggregate demand can be quite ineffective in stimulating lending to ensure output growth. The central banks need to resort to instruments other than the interest rate to stimulate credit markets.

    Solutions

    Solution
    Symposium 2014

    Introducing appropriate regulatory measures such as provision of free savings accounts to increase access of the poor to banking

    Introducing appropriate regulatory measures such as provision of free savings accounts to increase access of the poor to banking

    Introducing appropriate regulatory measures such as provision of free savings accounts to increase access of the poor to banking

    Polity, Academia, Business, Civil Society

    Proposals

    Proposal
    Symposium 2014

    Monetary Policy and Income Inequality

    More coordinated action by central banks should be pushed to increase the efficacy of monetary policy. Recent comments by some policymakers have criticized the position of some central banks in ignori ...

    More coordinated action by central banks should be pushed to increase the efficacy of monetary policy. Recent comments by some policymakers have criticized the position of some central banks in ignoring the implications of their actions on developing countries.  As a notable example, Ragu Rajan, a University of Chicago economist who is currently head of the Indian central bank, challenged US Federal Reserve policy under Ben Bernanke for ignoring the effects of its policies on capital flows to and from poorer nations. More generally, business cycles are not neutral in their adverse effects.  At least in the US, the increased

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2014

    Central Bank Reporting on Distributive Effects

    Central banks should report regularly on the distributive effects of their policies There is growing evidence that monetary policy is not neutral for income and wealth distribution. Coibion et al. (20 ...

    Central banks should report regularly on the distributive effects of their policies There is growing evidence that monetary policy is not neutral for income and wealth distribution. Coibion et al. (2012), for example, show that, in the United States, contractionary monetary policy systematically increases inequality in labor earnings and total income. The Bank of England (2012) estimates that 40% of the wealth increase resulting from its recent asset purchase program benefited the top 5% wealthiest households in the United Kingdom. Saiki and Frost (2014) find that the unconventional monetary policy pursued by the Bank of Japan after 2008 also widened

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2014

    An emerging markets view: To contribute to poverty (and inequality) reduction, Central Banks should focus not only on achieving low inflation and maintaining financial stability, but also on expanding access to banking services to a wider population.

    In emerging market economies, the relationship between monetary policy and income inequality poses a dual challenge. On the one hand, fighting inequality and poverty is more urgent as these phenomena ...

    In emerging market economies, the relationship between monetary policy and income inequality poses a dual challenge. On the one hand, fighting inequality and poverty is more urgent as these phenomena are more pervasive than in the advanced economies.  On the other hand, building a credible monetary framework requires focusing the central bank on few, clear and simple objectives.  Hence it is crucial to determine in which ways monetary policy may contribute to reducing inequality and poverty without affecting the pace at which central banks build up their credibility. Emerging market economies have been often prone to experience macroeconomic crises that

    Polity, Academia, Business, Civil Society

    Background Paper

    Background Paper
    Symposium 2014

    Monetary Policy and Income Inequality

    This fact sheet gives information on inequality patterns, recent trends in macroeconomic aggregates and the influence of monetary policy contractions on income and expenditure inequality.

    This fact sheet gives information on inequality patterns, recent trends in macroeconomic aggregates and the influence of monetary policy contractions on income and expenditure inequality.

    Polity, Academia, Business, Civil Society

    Virtual Library

    Virtual Library File
    Symposium 2014

    Guest Contribution: Innocent Bystanders? Monetary Policy in the U.S. and Inequality

    This piece is based on IMF Working Paper No. 199 and focuses on the effect of monetary policy on inequality.  The effect of monetary policy on inequality is ambiguous because there are various channe ...

    This piece is based on IMF Working Paper No. 199 and focuses on the effect of monetary policy on inequality.  The effect of monetary policy on inequality is ambiguous because there are various channels though which monetary policy can affect inequality.  The authors provide empirical evidence that contractionary monetary policy increases inequality.   They show that the main channels through which a monetary shock affect the distribution of income is though heterogeneity in labor income responses, heterogeneity in income sources and differential responses of savers and borrowers.

    Virtual Library File
    Symposium 2014

    What can monetary policy do about inequality

    This speech provides a central banker’s perspective on the question of whether inequality can be affected by monetary policy. More evidence has to be collected before economists can produce robust s ...

    This speech provides a central banker’s perspective on the question of whether inequality can be affected by monetary policy. More evidence has to be collected before economists can produce robust stylized facts about the relationship between monetary policy and inequality. However, it is clear that, by ensuring price stability over the medium term, monetary policy also contributes to broader economic stability. During recessions, it also has stabilizing effects on employment and poverty.

    Virtual Library File
    Symposium 2014

    Aspects of Inequality in the Recent Business Cycle

    This speech focuses on the effect of inequality on the US recovery after the financial crisis in 2008-9. Macroeconomists are far from a comprehensive understanding of how wealth and income inequality ...

    This speech focuses on the effect of inequality on the US recovery after the financial crisis in 2008-9. Macroeconomists are far from a comprehensive understanding of how wealth and income inequality may affect business cycle dynamics. There is much work to be done on understanding the ways in which income and wealth inequality affect aggregate behavior, and the implications for monetary policy. The Fed in particular should pay attention to how different segments of the income distribution are affected by monetary policy.

    Virtual Library File
    Symposium 2014

    Krugman v Stiglitz on what’s holding back the recovery

    This BBC Video investigates claims that inequality is hampering growth:http://www.bbc.com/news/business-25035267

    This BBC Video investigates claims that inequality is hampering growth:
    http://www.bbc.com/news/business-25035267