Is monetary policy increasing inequality?

The objective of the Eurosystem's monetary policy is a stable euro. Redistributing wealth or income within society, on the other hand, is the task of politicians. Despite this clear division of tasks, the central banks of the Eurosystem are currently being criticised for intensifying the unequal distribution of wealth in society. The Monthly Report describes how the general public holds the central banks' purchase programmes responsible for the considerable price increases seen in certain assets such as real estate and equities, which are associated with a redistribution towards wealthier individuals. That, however, would be a hasty conclusion in the Bank's view.

Critics ignore effects reducing inequality

First, the Bank's experts note that many critics ignore the fact that Eurosystem measures impact not only on asset prices but also on economic activity and the labour market, to name but two. Yet monetary policy measures that improve the situation in the labour market may lower the risk of unemployment, which would benefit low-skilled, poorer households. This is because members of such households are usually more likely to lose their job if the economic situation deteriorates. The labour market effect, then, has the potential to lower distributional inequalities, the Bank's economists conclude.

Distribution effects can change over time

Second, the article describes how many studies fail to take into account that potential monetary policy distributional effects do not impact simultaneously via all channels. Equity prices – an increase in which is more likely to benefit wealthier households – typically respond directly to monetary policy measures. By contrast, the impact of monetary policy on employment levels, say, only emerges some time later. However, the latter effects were more likely to benefit poorer households. The authors of the article thus conclude that the distributional effects of non-standard monetary policy measures can change as time progresses since the measure in question was taken. "Measures which initially appear to be redistributing upwards, can turn out to have the opposite effect later on," the Bundesbank economists write. Another point critics had in many cases failed to consider was how things would have developed if monetary policy measures had not been implemented. Instead, they had made their assumptions based on the distributional situation before the monetary policy measure was introduced. However, the monetary policy measures had often been introduced for the very reason that the macroeconomic situation at the time was at risk of changing.

Overall effect on the distribution of wealth unclear

Bundesbank economists used current research to investigate what distributional effects the Eurosystem's non-standard monetary policy measures might actually have had. They found that the non-standard monetary policy measures might have increased wealth inequality in the short term by raising asset prices. The medium to long-term effect, however, was not yet clear, since that was strongly dependent on the macroeconomic adjustment processes triggered in response to the monetary policy measures.
As for the distribution of income, the Bundesbank experts believe that the non-standard monetary policy measures probably even caused inequality to diminish. They report that recent empirical studies from the USA and the United Kingdom had shown that an unexpected cut in policy rates reduces income inequality. The fact that the cut had reduced unemployment in the short term was pivotal for this outcome, they found. "A decline in income inequality as a result of non-standard monetary policy measures seems probable insofar as non-standard measures do not have an entirely different impact on the distribution than conventional monetary policy, at least in essential respects," the Bundesbank economists therefore concluded.