CMV: The European Central Bank should consider the distributive effects of its monetary policy

Fri May 18 2018 15:00:00 GMT+0000 (Coordinated Universal Time)


Peter Dietsch

University of Montréal


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Suppose your doctor prescribes you a drug without taking into account likely and serious side-effects. You would rightly be upset. Suppose the European Central Bank (ECB) prescribes ultra-low interest rates and high levels of liquidity without taking into account that this monetary policy will exacerbate inequalities in income and wealth. Should we be upset?
I argue the analogy holds. There is widespread agreement today that the magnitude of current economic inequalities is unjust. The ECB’s response to the financial crisis such as the wholesale buying up of (mostly government) bonds to boost liquidity called “quantitative easing” can be shown to have deepened inequalities. Cheap credit and a high money supply have driven the prices of stocks and houses to historic highs. This favours the owners of such assets over the have-nots who solely rely on – relatively much more stagnant – income.
Central bankers object that even if all this is true, it does not follow that they should take into account the distributive effects of their monetary policy. First, they argue that it is not their job. Granted, the ECB’s mandate does not include a reference to inequalities. However, that is not the point. The point is whether it should include such a reference.
Second, central bankers have argued that the alternative to quantitative easing was financial meltdown, with an even more disastrous impact on inequalities in tow. This argument is too quick. True, doing nothing would have resulted in financial meltdown. But doing nothing was not the only alternative the ECB should have taken into account then or consider in future situations of this kind. Less inegalitarian remedies to financial crises are available and should be given serious consideration.
Third, even if central bankers conceded that taking distributive consequences of their policy into account was desirable, they would argue that there is no feasible institutional arrangement to do so. Of course, it would be absurd for the ECB mandate to assign inequality reduction the same status as price stability or financial stability. This would turn the ECB into a kind of modern Robin Hood.
However, more moderate and realistic approaches are available. One such proposal requires central banks to take the distributive consequences of their actions into account only when they result in a large increase in the bank’s balance sheet. Quantitative easing falls into this category.

Background Information

  • In general, central banks are not bound to address social and fiscal inequalities in the distribution of wealth, income and consumption.

    • Likewise, the European Central Bank’s (ECB) primary mandate is not of distributive nature, but “to maintain price stability is the primary objective of the Eurosystem and of the single monetary policy for which it is responsible. This is laid down in the Treaty on the Functioning of the European Union, Article 127 (1)”

  • However, in the recent past and especially after and during the financial crisis, EU and ECB officials have acknowledged that this narrow conception of the ECB’s tasks and objectives is increasingly difficult to uphold:

    • “Particularly at a time of exceptionally low interest rates and non-standard monetary policy measures, it is essential for us to be aware of all collateral effects – including the distributional ones, i.e. the potential economic damage to some parts of society; and the potential benefits for others.”

      - Yves Mersch (Member of the Executive Board of the ECB)

    • Inequality is of interest to central banking discussions because monetary policy itself has distributional consequences which in turn influence the monetary transmission mechanism -> “For example, the impact of changes in interest rates on the consumer spending of an individual household depend crucially on that household’s overall financial position”


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