"Monetary policy for all? Inequality and the conduct of monetary policy"

" \n Inequality in both advanced economies and emerging markets has been on the rise in recent decades. The COVID-19 pandemic has exacerbated and raised awareness of disparities between the rich and poor. \n \n\n \n Fiscal policies and structural reforms are long known to be powerful mitigators of inequality. But what role can the central bank play? \n \n\n \n In <a href=\"https:\/\/lnks.gd\/l\/eyJhbGciOiJIUzI1NiJ9.eyJidWxsZXRpbl9saW5rX2lkIjoxMDQsInVyaSI6ImJwMjpjbGljayIsImJ1bGxldGluX2lkIjoiMjAyMDA5MzAuMjc5NTg0NzEiLCJ1cmwiOiJodHRwczovL3d3dy5pbWYub3JnL2VuL1B1YmxpY2F0aW9ucy9XUC9Jc3N1ZXMvMjAyMC8wOS8yNS9TaG91bGQtSW5lcXVhbGl0eS1GYWN0b3ItaW50by1DZW50cmFsLUJhbmtzLURlY2lzaW9ucy00OTc1Nj91dG1fbWVkaXVtPWVtYWlsJnV0bV9zb3VyY2U9Z292ZGVsaXZlcnkifQ.GYJXlX2yN-I1JO99xyYFUxILGsU0YqVaW86AoV_BHz8\/s\/1181822789\/br\/86149992546-l\" target=\"_blank\" rel=\"noreferrer noopener\">new IMF staff research , we find a case for central bankers to take inequality specifically into account when conducting monetary policy. \n \n\n \n A new view on monetary policy \n \n\n \n Even though inequality remains outside central banks\u2019 mandates, major central bankers are increasingly\u00a0<a href=\"https:\/\/lnks.gd\/l\/eyJhbGciOiJIUzI1NiJ9.eyJidWxsZXRpbl9saW5rX2lkIjoxMDUsInVyaSI6ImJwMjpjbGljayIsImJ1bGxldGluX2lkIjoiMjAyMDA5MzAuMjc5NTg0NzEiLCJ1cmwiOiJodHRwczovL3d3dy5mZWRlcmFscmVzZXJ2ZS5nb3YvbmV3c2V2ZW50cy9zcGVlY2gvcG93ZWxsMjAyMDA4MjdhLmh0bT91dG1fbWVkaXVtPWVtYWlsJnV0bV9zb3VyY2U9Z292ZGVsaXZlcnkifQ.xO0RjIC4FEjZ0bbtGVAOz4PGNtnnG_YhlkHnNIPu-Ac\/s\/1181822789\/br\/86149992546-l\" target=\"_blank\" rel=\"noreferrer noopener\">discussing \u00a0distributional issues. \n \n\n \n At the same time, recent advances in economic theory shed new light on the interplay of monetary policy and inequality. \n \n\n \n It is now accepted within academia and major central banks that wealth and income inequality affect the effectiveness of monetary policy. \n \n\n \n This is because the poor, who tend to be more liquidity constrained than the rich, increase their consumption more as their incomes rise in response to an interest rate cut. \n \n\n \n The same rate cut thus stimulates aggregate consumption more in an economy with a larger proportion of the poor. Relatedly, there is\u00a0<a href=\"https:\/\/lnks.gd\/l\/eyJhbGciOiJIUzI1NiJ9.eyJidWxsZXRpbl9saW5rX2lkIjoxMDYsInVyaSI6ImJwMjpjbGljayIsImJ1bGxldGluX2lkIjoiMjAyMDA5MzAuMjc5NTg0NzEiLCJ1cmwiOiJodHRwczovL3ZveGV1Lm9yZy9hcnRpY2xlL21vbmV0YXJ5LXBvbGljeS1hbmQtaW5lcXVhbGl0eS11cz91dG1fbWVkaXVtPWVtYWlsJnV0bV9zb3VyY2U9Z292ZGVsaXZlcnkifQ.y846ulAR2sI_D7emMvzg42b5tF49XWeKVFHvBMJyR6I\/s\/1181822789\/br\/86149992546-l\" target=\"_blank\" rel=\"noreferrer noopener\">evidence \u00a0supporting that monetary policy itself can affect inequality. \n \n\n \n Our research asks whether inequality affects the way monetary policy should be conducted in a stylized economy where business cycles are driven by innovations in technology. \n \n\n \n In this setting, a rich person\u2014call her R\u2014owns all the capital. R\u2019s income is thus composed of after-tax dividends and wages. In contrast, a poor person\u2014 call her P\u2014receives only wages and a transfer from the government financed by the dividend tax. \n \n\n \n In the model, profits and capital income rise in response to positive productivity shocks, thereby exacerbating inequality. Moreover, wages are tech-biased: when productivity rises, R\u2019s share of total wage income goes up, while P\u2019s declines. \n \n\n \n These mechanisms are consistent with US micro- and macro-economic data and match the empirical effects of technology shocks on consumption inequality. \n \n\n \n We study implications for monetary policy in two settings. In the first, the central bank chooses the best possible path of interest rates with full information and caring equally about all individuals. \n \n\n \n This setting is called \u201coptimal policy.\u201d In the second setting, the central bank sets monetary policy according to a so-called Taylor rule, which prescribes a given interest rate based on whether inflation and output deviate from desired levels. \n \n\n \n This second setting is useful because it is closer to what central banks do in practice. In our study, the relevant concept of inequality is the difference in consumption between rich and poor. \n \n\n \n Implications for monetary policy \n \n\n \n In the first setting, we find that a central bank should place some weight on observed consumption inequality. \n \n\n \n That means the central bank will use monetary policy, i.e. setting interest rates to stimulate growth and wages, which has the effect of reducing consumption inequality while tolerating inflation moving above its target. \n \n\n \n However, we find that this weight is generally small and thus output and inflation are not that different from those that would prevail if the central bank ignored inequality. \n \n\n \n Interestingly, a central bank pursuing such \u201coptimal policy\u201d cares progressively less about inflation and more about growth the higher the initial level of inequality. \n \n\n \n This is because when initial inequality is high the central bank will try harder to adjust interest rates to stabilize wages and protect the consumption of the poor. Thus, stabilizing wages, and hence inequality, coincides with stabilizing growth. \n \n\n \n In the second setting, we find that a central bank should pursue an augmented \u201cTaylor rule\u201d targeting also consumption inequality. \n \n\n \n That means following a positive productivity shock, interest rates should be set lower than the level implied by a standard Taylor rule that targets output and inflation alone. \n \n\n \n A policy of lower interest rates leads to higher wages which benefits the poor. Beyond lowering inequality, such a policy is also beneficial more generally because it improves inflation and growth outcomes by avoiding excessive tightening of the interest rate in response to a positive productivity shock. \n \n\n \n These results suggest that welfare could be improved if central banks take inequality into account when conducting monetary policy, particularly if following typical interest rate rules. \n \n\n \n Our results of course are model specific and can be complemented by considering additional features e.g. by including differentiated types of labor and hence differentiated wages, or a richer set of available assets. \n \n\n \n The results bolster the case for more theoretical and empirical work on the issue. \n "

"Monetary policy for all? Inequality and the conduct of monetary policy"

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