Their unorthodox experiment stimulated recovery but did it also exacerbate wealth inequality?by Paul Wallace / July 25, 2018 / Leave a comment
Central bankers are a conservative tribe but they have torn up the rulebook since the financial crisis a decade ago. They have pushed interest rates down to record lows, even into negative territory. And through quantitative easing they have bought bonds with newly created money on an epic scale. This has vexed savers who rely on interest from deposits rather than investments. There is widespread concern about the fairness of policies that have stoked asset prices.
These criticisms get short shrift in a recent discussion paper from the European Central Bank. “On the whole we find that monetary policy in recent years benefited most households and did not contribute to an increase in wealth, income or consumption inequality,” said the six economists (five from the ECB and one at Princeton University). This chimed with similar conclusions in research from the Bank of England earlier this year. How convincing are these findings, especially given that they are being published by the very institutions under scrutiny?
In big-picture terms, central bankers have a strong case to make (though they can be blamed for allowing the financial crisis to blow up in the first place). Their battery of unorthodox policies blunted the recession that followed the crisis and stimulated a recovery. That in turn boosted labour income and curbed unemployment.
These overall beneficial effects have outweighed the costs for example to savers in lower interest, according to the ECB research. Indeed a disproportionately big drop in unemployment among poorer households is the main reason why it finds that quantitative easing (which the ECB belatedly began in 2015) has modestly reduced income inequality in the four biggest eurozone economies.
A similar story can be told for Britain. Indeed a notable feature of the recession was that unemployment rose by less than had been feared—and then fell by more than expected. The Bank of England reckons that the unemployment rate would have been four percentage points higher but for its policy loosening.
If central banks can occupy the high ground in terms of the overall impact of their policies, the claim that they have had no adverse effect on wealth distribution is more controversial. Their flagship policy of QE works mainly through a “portfolio rebalancing” effect whereby purchases of government debt ripple through asset markets, pushing up their prices, and thus making their owners richer.
Economists at the BoE spelt out the…