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Monetary Policy, Macroprudential Regulation and Inequality

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  • Pierre Monnin

    (Council on Economic Policies)

Abstract

The 2008 global financial crisis profoundly changed the role of central banks in the economy. First, central banks engaged in strong expansionary monetary policy, using new unconventional tools to boost economic activity. Second, they were key to containing financial instability, which led them to implement new macroprudential policies to foster future financial stability. The debate about whether these policies have been effective is still ongoing, and often neglects two other crucial issues: What has been the impact of these policies on income and wealth distribution? Does inequality of income and wealth affect whether central bank policies reach their targets? This note highlights research on these two questions presented during a CEP IMF workshop on “Monetary Policy, Macroprudential Regulation and Inequality” and puts them into perspective with other recent theoretical and empirical results. Evidence shows that monetary policy and macroprudential regulation are not neutral in terms of income and wealth distribution. Conventional and unconventional expansive monetary policy both appear to decrease income inequality, mainly through their impact on the labor market, and to increase wealth inequality. Theoretically, macroprudential regulation could also affect inequality, but empirical studies exploring this hypothesis are scarce. Income and wealth distribution also influences the transmission of monetary policy impulses to the aggregate economy. To design effective monetary policy, it is crucial to assess whether the current income and wealth structures in a country accentuate or dampen monetary impulses, and to what extent they do so. Moreover, theoretical and empirical evidence points to an effect of inequality on financial stability. A thorough understanding of this impact is key to shaping optimal monetary policy and macroprudential regulation.

Suggested Citation

  • Pierre Monnin, 2017. "Monetary Policy, Macroprudential Regulation and Inequality," Discussion Notes 1702, Council on Economic Policies.
  • Handle: RePEc:ceq:discno:1702
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    References listed on IDEAS

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    Cited by:

    1. Ayako Saiki & Jon Frost, 2018. "Japan's Unconventional Monetary Policy and Income Distribution: Revisited," Working Papers e126, Tokyo Center for Economic Research.
    2. D'Orazio, Paola, 2019. "Income inequality, consumer debt, and prudential regulation: An agent-based approach to study the emergence of crises and financial instability," Economic Modelling, Elsevier, vol. 82(C), pages 308-331.
    3. Metzger, Martina & Young, Brigitte, 2020. "No gender please, we're central bankers: Distributional impacts of quantitative easing," IPE Working Papers 136/2020, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    4. Bunn, Philip & Pugh, Alice & Yeates, Chris, 2018. "The distributional impact of monetary policy easing in the UK between 2008 and 2014," Bank of England working papers 720, Bank of England.
    5. Armand Fouejieu & Ratna Sahay & Martin Cihak & Shiyuan Chen, 2020. "Financial inclusion and inequality: A cross-country analysis," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 29(8), pages 1018-1048, November.

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