It is an important debate, bearing on the legitimacy and the consequences of what central banks do, especially in this era of crises. The vision of BIS itself is threefold. First, the rise in inequality since 1980 is “largely due to structural factors, well outside the scope of monetary policy, and is best addressed by fiscal and structural policies”.
Second, by fulfilling their monetary mandates, central banks can reduce the impact of short-term shocks on economic well-being caused by inflation, financial crises and, undoubtedly, real shocks (such as pandemics). . Finally, central banks can also tackle inequalities with good prudential regulation, fostering financial development and inclusion and ensuring safe and efficient payments.
This all makes sense, as far as it goes. It is clear, for example, that falling real interest rates and accommodating monetary policies have tended to push up asset prices, to the benefit of the wealthier. But, interestingly, the measured impact on wealth inequality has not been as dramatic as one might expect.
More importantly, it would have made no sense to adopt an intentionally more restrictive monetary policy just to lower asset prices. This would have reduced activity and increased unemployment. This is the worst thing that can happen to people who depend on their wages for their livelihood.
Meanwhile, how would the majority of people, who own almost no assets, be better off because billionaires were a little poorer? It would be foolish for central banks to cause collapses to lower asset prices.
A more relevant concern is raised by the prevailing contemporary demand to “run the economy on the hot”. This raises two real (and perhaps related) dangers: inflation and financial instability.
In the first case, proponents of this approach argue that one cannot know where the risk of significant inflation lies without pushing the economy not only to the limit, but beyond. But it could also prove costly if, as some fear, inflation spikes and this overshoot turns out to be very costly to reverse.
On the latter, it is hoped that sophisticated regulation will reduce financial instability, even in the simplest monetary environment imaginable. This could be true, under ideal regulation. But regulation is never ideal. In addition, it is already easy to identify vulnerabilities, especially in the non-bank financial sector. There is so much debt. This can be good if interest rates stay low. But will they? Focusing on results, not forecasts, makes this less likely.
Where the BIS is clearly right is that fiscal and structural policies are the main means of tackling inequality. Indeed, some high-income countries are quite efficient at using the former in this way.
The big contrast between the United States and other high-income countries when it comes to income inequality, for example, is the relative lack of redistribution in the former. In some large emerging economies, there is little redistribution, especially in so-called socialist China.
Structural policy is an even more complex issue. Too often, this is just a synonym for market liberalization. But financial liberalization has certainly increased inequalities and financial instability. Thus, a good structural reform would almost certainly seek to restrict funding.
Likewise, in labor markets characterized by large monopsonies, deregulation of the labor market may well be detrimental to employment and inequalities.
In addition, rising inequality is almost certainly a structurally weak demand creation factor that explains the fall in real interest rates and soaring debt that characterizes our era of “secular stagnation”. For all these reasons, the structural reforms we should be thinking about are more difficult than we imagine.
The BIS is right that monetary policy cannot solve inequalities. It can only aim for broad macroeconomic stability. Even this is difficult to achieve, given our chronic reliance on expansionary monetary policy.
Against this backdrop, financial excesses are sure to reappear, making regulation a never-ending game of “knocking a mole”. The BIS is right to call for radical structural reforms. But they have to be the right kind of structural reforms.