Monetary Policy for all? Inequality and the Conduct of Monetary Policy

2020-10-02T10:55:54-04:00September 30, 2020|

By Niels-Jakob Hansen, Alessandro Lin, and Rui C. Mano

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.

Fiscal policies and structural reforms are long known to be powerful mitigators of inequality. But what role can the central bank play?

In new IMF staff research, we find a case for central bankers to take inequality specifically into account when conducting monetary policy.

A new view on monetary policy

Even though inequality remains outside central banks’ mandates, major central bankers are increasingly discussing distributional issues. At the same time, recent advances in economic theory shed new light on the interplay of monetary policy and inequality.

It is now accepted within academia and major central banks that wealth and income inequality affect the effectiveness of monetary policy. 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. The same rate cut thus stimulates aggregate consumption more in an economy with a larger proportion of the poor. Relatedly, there is evidence […]