The redistributive effects of QE

2013

We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy. 1 I

Journal of International Money and Finance, 2018

The 2007-2008 financial crisis gave central banks a dominant role in the economy. They were in the forefront of the effort to boost economic activity through conventional policies and unconventional tools. And they tried to contain financial instability by implementing several macroprudential policies. There are debates about how effective these policies have been. The crisis also revived debates about the distributional impacts of central bank actions. Central banks had tended to downplay such impacts, arguing that most of the population benefits from their policies and that distributive consequences are negligible. However, the drastic interest rate cuts by central banks and the implementation of unconventional monetary tools (such as large asset purchases and longer-term refinancing operations) have led to concerns that such unprecedented measures have a stronger impact on inequality than the ''business-as-usual" policies before the crisis. Three questions have featured prominently in these debates: (1) What is the impact of conventional and unconventional monetary policies on inequality? (2) Does inequality alter the transmission of monetary policy to the economy? (3) What are the links between macroprudential regulation and inequality? This special section presents some of the research on these three questions presented during the CEP-IMF workshop on ''Monetary Policy, Macroprudential Regulation and Inequality" held in Zurich on October 3-4, 2017. This introduction presents the main findings of the papers included in this special section and puts them into perspective with recent theoretical and empirical results. Conventional and unconventional monetary policy impact on households' income through three main channels:

Social Science Research Network, 2017

RePEc: Research Papers in Economics, 2020

While a large body of literature examines the impact of quantitative easing (QE) on the financial sector and discusses the thereby adjusted roles and mandates of central banks, distributional impacts of QE had been hardly reflected. This paper critically analyses the current state of understanding of distributional impacts of QE in the course of the global financial crisis from a theoretical perspective. We identify various transmission channels of QE which jointly result in quantity, price and structural effects on the balance sheet of financial intermediaries in the respective economies, based on which we assess distributional impacts of QE on households' income and wealth. In contrast to the literature we find that QE is not neutral in the long term. Due to the asymmetric power of central banks, QE increases wealth inequality and has ambivalent effects on income inequality. Negative impacts of economic downturns in particularly for low-income households are not completely reversed in expansionary phases; to that effect rising wealth and income inequality show hysteresis effects which are not mitigated by QE. A second finding regarding the theoretical framework is that there is a structural neglect of incorporating gender impacts of QE in the analysis; accordingly, gender-related impacts are neither considered in empirical studies nor taken into account in policy formulation and policy design. These blind spots need to be explored by future research in order to identify undesirable side effects of monetary policy.

SSRN Electronic Journal, 2021

This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

SSRN Electronic Journal, 2022

We use Finnish household-level registry and survey data to study the effects of ECB's monetary policy on the distribution of income and wealth. We find that monetary easing has a large positive effect on aggregate economic activity in Finland, but its overall net impact on income and wealth inequality is negligible. Monetary easing increases households' gross income by reducing unemployment and leading to a general rise in wages, while at the same time it boosts asset prices. These different channels have counteracting effects on income and wealth inequality, as measured by the Gini coefficient and the ratios of income and wealth of the 90 th percentile to the 50 th percentile. The reduction in aggregate unemployment benefits especially households in lower income quintiles, where the initial rate of unemployment is high. Households in the upper income quintiles, where the rate of employment is higher, benefit relatively more from an increase in wages. An increase in house prices benefits all homeowners. In terms of net wealth, households with large mortgages, in the lower wealth quintiles, benefit the most from an increase in house prices due to a leverage effect. An increase in stock prices, in turn, benefits mainly households in the top wealth quintile.

Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty, 2019

Evidence reveals that an unexpected increase in the manufacturing, tradeable, and mining sector employment shares, leads to significant reduction in income inequality. • The reduction in income inequality, due to shocks from these sectors' employment shares, is amplified by low inflationary environment (that is, the consumer price inflation below or equal to 6%). • In addition, the reduction in income inequality is further amplified by the low repo rate level when consumer price inflation is below the 6% threshold. • This evidence reveals that inflation regimes matter for expansionary monetary policy to influence the reduction in income inequality due to improved manufacturing sector employment shares. 8 Does Monetary Policy Impact the Effects of Shares of Manufacturing Employment Shocks on Income Inequality?

2015

This thesis examines the reaction of monetary policy to income inequality and the effect of asset price changes and financial sector development on income inequality. The actions of monetary authorities in the U.S and elsewhere during the financial crisis period have had a major impact on financial markets. Given that financial asset prices respond quickly to new information about monetary policy shifts, the Fed’s low interest rate policy stance that started in August 2007 led to a significant increase in asset prices, particularly stock prices. Stock prices appreciation transfers wealth to those households who already own stocks; generally speaking, the wealthier American households. Consequently, it is important to examine empirically the dynamics of monetary policy, asset prices and financial development on income inequality. First, we examined the response of monetary policy to income inequality. We tried to provide empirical answers to the following questions; is there any evid...

Structural Change and Economic Dynamics, 2020

We assess the effects of monetary policy shocks on income and wealth inequality through direct inequality measures and by analyzing several transmission channels explored in recent literature. Furthermore, we analyze two additional channels: the Housing and the Fiscal channels. The methodology adopted is a Bayesian proxy SVAR using a high-frequency identification based on the external instruments approach. Our own policy shocks are constructed for this purpose. The results show that an expansionary monetary policy shock does not have a significant effect on income inequality due to the existence of opposite channels, whereas it increases wealth inequality mainly through the portfolio channel.

Politics, Philosophy & Economics (PPE)

What is the relation between monetary policy and inequalities in income and wealth? This question has received insufficient attention, especially in light of the unconventional policies introduced since the 2008 financial crisis. The article analyzes three ways in which the concern central banks show for inequalities in their official statements remains incomplete and underdeveloped. First, central banks tend to care about inequality for instrumental reasons only. When they do assign intrinsic value to containing inequalities, they shy away from trade-offs with the standard objectives of monetary policy that such a position entails. Second, central banks play down the causal impact monetary policy has on inequalities. When they do acknowledge it, they defend their actions by claiming that it is an unintended side effect, that it is temporary, and/or that any alternative policy would fare even worse. The article appeals to the doctrine of double effect to criticize these arguments. T...

SSRN Electronic Journal, 2021

This report discusses the role of the European Union's full employment objective in the conduct of the ECB's monetary policy. It first reviews a range of indicators of full employment, highlights the heterogeneity of labour market outcomes within different groups in the population and across countries, and documents the flatness of the Phillips curve in the euro area. In this context, it is stressed that labour market structures and trend labour market outcomes are primarily determined by national economic policies. The report then recalls that, in many circumstances, inflation and employment move together and pursuing price stability is conducive to supporting employment. However, in response to economic shocks that give rise to a temporary trade-off between employment and inflation stabilisation, the ECB's medium-term orientation in pursuing price stability is shown to provide flexibility to contribute to the achievement of the EU's full employment objective. Regarding the conduct of monetary policy in a low interest rate environment, model-based simulations suggest that history-dependent policy approaches − which have been proposed to overcome lasting shortfalls of inflation due to the effective lower bound on nominal interest rates by a more persistent policy response to disinflationary shocks − can help to bring employment closer to full employment, even though their effectiveness depends on the strength of the postulated expectations channels. Finally, the importance of employment income and wealth inequality in the transmission of monetary policy strengthens the case for more persistent or forceful easing policies (in pursuit of price stability) when interest rates are constrained by their lower bound.

SSRN Electronic Journal, 2012

Innocent Bystanders? Monetary Policy and Inequality in the U.S. * We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed microlevel data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.

Journal of Insurance and Financial Management, 2016

The financial crisis in 2008 left many Central Banks' normal liquidity transmission channels impaired and forced Central Banks to devise new ways to conduct their monetary operation. As a result, the European Central Bank (ECB) and the American Federal Reserve (the Fed) started experimenting with unconventional policies by purchasing a significant amount of private and government assets. The unconventional monetary policy gave Central Banks (C.B.s) new transmission channels to affect interest rates and manage inflation. That process is commonly referred to as Quantitative Easing (Q.E.). The paper evaluates Q.E. policies' impact on interest rates, inflation, unemployment rates, and inequality. This paper also examines the effects of the ECB's Q.E. policies on the redistribution of risks in the Eurosystem by reviewing the changes in the Trans-European Automated Real Gross Settlement Express Transfer System (TARGET) balance. Finally, the paper concludes that the Fed's Q.E. program is more successful in stimulating the economy and managing inflation and interest rates compared to the ECB. Furthermore, empirical evidence indicates that classical theories and models are losing their predictive abilities to forecast inflation and employment. Moreover, the paper highlights links between Q.E. and increased levels of wealth inequality and recommends further empirical investigation. Lastly, it concludes that the ECB monetary policy actively redistributes risks and liabilities across member countries of the euro area system.

The article investigates the relationship between ECB 's monetary policy, SGP constrained fiscal policies of EMU members, the growth levels and the members' social development pattern embodied as income distribution. Panel co integration analysis is employed for the period between 1999 and 2008 in search for the impact of economic and monetary unification of the first 12 EMU members on the increasing income inequality. The results of the empirical analysis show that both the monetary policy of ECB and the restrained fiscal policies of the EMU members have negative effects on income equality. The findings also suggest that growth has positive effect on income distribution but the pace ofGDP growth is declining in EMU. Bu r;alr~ma Avrupa Merkez Bankasz 'nm (AMB) para politikasz, Ekonomik ve Parasal Birlige (EPB) iiye iilkelerin Biiyiime ve istikrar Paktz kurallarz r;err;evesinde uyguladzklarz maliye politikalarz ve biiyiime seviyeleri ile iilkelerin sosyal kalkmma modelinin gostergesi alan gelir dagzlzmz arasmdaki ili~kiyi ara~tzrmaktadzr. EPB olu~umunun ilk 12 iiyenin

This report addresses growing concerns about income inequalities in academic and policy debates by offering a comprehensive study of income inequalities during the years of the Great Recession starting in 2008–2009 (income data relating to 2004–2013). It has the twofold objective of adopting an EU-wide perspective and providing an updated picture of inequalities across different sources of income and in most Member States. The results show that EU-wide income inequality declined notably prior to 2008, driven by a strong process of income convergence between European countries – but the Great Recession broke this trend and pushed inequalities upwards both for the EU as a whole and across most countries. While previous studies have pointed to widening wage differentials as the main driver behind the long-term trend towards growing household disposable income inequalities across many European countries, this report identifies unemployment and its associated decline in labour income as the main reason behind the inequality surges occurring in recent years. Real income levels have declined and the middle classes have been squeezed from the onset of the crisis across most European countries. The role played by the family pooling of income in reducing inequalities and the impact of European welfare policies in cushioning the effect of economic turbulences on the distribution of income are also explored.