Monetary Policy’s Distributional Effects – IMF F&D
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Bibliographic details
- Authors: NINA BUDINA, HELENE POIRSON, CHIARA FRATTO, DENIZ IGAN
- Published: June 1, 2021
Overview
- Central banks worldwide responded to the COVID-19 pandemic with extensive monetary easing, including interest rate cuts and asset purchases, which helped limit the pandemic’s economic fallout.
- Whether accommodative policies exacerbate inequality is debated: monetary easing has boosted equity markets (benefiting the wealthy) but can also reduce inequality by stimulating activity and reducing unemployment.
- The net distributional effect of monetary easing depends on income, wealth, savings, and debt positions across households.
The Sampsons: an illustrative household-level scenario
- Household composition: Lisa (young, low-skilled worker, borrower), Margarita and Homero (retired, net savers), Arturo (older, earns wage, has capital income and home).
- Effects for Lisa:
- Benefits from labor earnings channel: monetary easing makes recessions less harsh on unemployment and disproportionately benefits younger, less experienced, and lower-paid workers.
- Benefits from lower debt servicing costs as a net borrower (student and car loans).
- Does not gain directly from higher capital income or higher asset prices due to lack of assets.
- Effects for Arturo:
- Gains via income composition channel from higher capital income and via balance sheet channel from higher values of bonds, stocks, and real estate.
- If a net saver, would be hurt by lower interest income from deposits.
- Effects for Margarita and Homero:
- Hurt by lower interest income from bank deposits when rates fall, potentially reducing retirement income in real terms.
- Possible offset from higher home values and reduced need to financially support family members if jobs are secured.
Distributional transmission channels
- Labor earnings channel: monetary easing stimulates economic activity and reduces unemployment, disproportionately benefiting younger and lower-paid workers.
- Income composition channel: households with capital income (bonds, stocks) benefit when returns rise.
- Balance sheet channel: owners of real assets (houses, stocks, bonds) benefit from higher asset prices.
- Savings redistribution channel: monetary easing redistributes from savers to borrowers; savers with little debt and large deposits tend to lose, while net borrowers tend to gain (Auclert 2019; Tzamourani 2021).
- Country characteristics matter:
- Financial inclusion: in countries with higher financial inclusion, poor households may access credit and mortgages and benefit from lower rates.
- Payment practices: in countries where people buy homes for cash, lower rates may not benefit those buyers.
- Financial system structure: in bank-based systems, deposit-holding non-debt households may lose from savings redistribution.
- Social protection: extensive social protection can mute employment-related benefits from easing for lower-income workers.
Asset ownership patterns and regional notes
- Capital income matters most for the wealthiest households because they hold more financial assets.
- In the United States:
- “Almost two-thirds of the assets of the wealthiest 10 percent are in bonds (16 percent) and stocks (46 percent).”
- For most households in both the European Union and the United States, real estate is the largest asset, so house price increases and mortgage relief via lower rates can have more equitable effects than capital income gains.
Empirical evidence (pre–COVID-19)
- Studies that combine multiple channels find mixed and often economically negligible net distributional effects overall from transitory monetary policy easing, with variation across countries and between conventional (interest rates) and unconventional (asset purchases) policies.
- Example: In the United States, following monetary easing:
- Income inequality rises and consumption inequality falls, but the effects are small and temporary (Kaplan, Moll, and Violante 2018).
Policy implications and recommendations
- Monetary policy is a blunt instrument for addressing inequality; adding inequality reduction explicitly to central bank mandates could undermine price and output stability.
- Governments are better placed to address long-term inequality with targeted fiscal measures and structural reforms.
- Central banks should:
- Remain focused on primary mandates (price and output stability and countering downturns) while taking appropriate action to protect jobs.
- Better understand and factor in household heterogeneity in existing policy frameworks through modeling and analysis of income and wealth distributions that affect monetary transmission.
- Communicate clearly about the distributional effects of monetary policy—both positive and negative—via speeches, official reports, and community outreach to preserve public trust and clarify capabilities under their mandates.
- Supportive fiscal policy and well-sequenced structural reforms—such as active labor market policies including job search assistance and retraining—combined with monetary easing can improve macroeconomic and distributional outcomes.
Role during COVID-19 and beyond
- The pandemic has significant distributional effects; the relative importance of transmission channels may change if the pandemic persistently alters income and wealth distributions.
- Central banks should:
- Monitor, analyze, and communicate distributional effects.
- Highlight counterfactuals showing overall increases in welfare from monetary actions despite potential distributional impacts.
- Explain that secular increases in inequality and long-term declines in interest rates are driven largely by structural factors addressable mainly through other government policies.
- Major central banks are beginning to discuss distributional effects explicitly (Carney 2016; Lane 2019), and the Federal Reserve has revised its mandate to emphasize maximum employment as a broad-based, inclusive goal.
Based on an IMF F&D article by Nina Budina, Hélène Poirson, Chiara Fratto, and Deniz Igan (June 2021).
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