The Redistributive Consequences of Monetary Policy

By Nakajima, Makoto | Business Review (Federal Reserve Bank of Philadelphia), Summer 2015 | Go to article overview

The Redistributive Consequences of Monetary Policy


Nakajima, Makoto, Business Review (Federal Reserve Bank of Philadelphia)


The Federal Reserve conducts monetary policy in order to achieve maximum employment, stable prices, and moderate long-term interest rates. Monetary policy currently implemented by the Federal Reserve and other major central banks is not intended to benefit one segment of the population at the expense of another by redistributing income and wealth. Any decisions regarding redistribution are considered to be the province of fiscal policy, which is determined by elected policymakers. However, it is probably impossible to avoid the redistributive consequences of monetary policymaking. As this article will explore, households differ in many dimensions--including their assets and debt, income sources, and vulnerability to unemployment--and monetary policy affects all these factors differently.

Even if one accepts the idea that monetary policy is not immune to redistributive effects, one could argue that the redistributive consequences are probably negligible if booms and recessions are mild enough that monetary policy does not need to cause large effects to ameliorate the fluctuations of the economy or keep inflation stable. The period between the mid-1980s and mid-2000s, called the Great Moderation, was such a period. During those years, the Federal Reserve conducted conventional monetary policy by making relatively small adjustments in the short-term policy target interest rate, known as the federal funds rate. However, in response to the Great Recession, the Federal Reserve moved aggressively by not only cutting the federal funds rate to essentially zero but also by implementing various unconventional measures such as communicating the expected timing and degree of future changes in the federal funds rate and purchasing large amounts of U.S. Treasury securities and mortgage-backed securities. When a central bank conducts such aggressive monetary policy, redistributive consequences might be more important.

It might be also true that the gain to society's well-being from stabilizing the overall economy is greater than the loss coming from associated redistributive effects, in which case we could safely focus on the overall effects and ignore the redistributive effects. Former Fed Chairman Ben Bernanke argued along these lines in January 2012 in response to the argument that the Fed was hurting savers by keeping the policy rate low:

      In the case of savers, you know, we think about all these issues,
   and we certainly recognize that the low interest rates that we've
   been using to try to stimulate investment and expansion of the
   economy also imposes a cost on savers who have a lower return....
   I guess the response I would make is that the savers in our economy
   are dependent on a healthy economy in order to get adequate return
   .... So I think what we need to do, as is often the case when the
   economy gets into a very weak situation, then low interest rates
   are needed to help restore the economy to something closer to full
   employment and to increase growth and that, in return, will lead
   ultimately to higher returns across all assets for savers and
   investors. (1)

One could also argue that, in the long run, the redistributive consequences of monetary policy might average out. In other words, if the same type of households that tend to gain from monetary policy during economic expansions also tend to lose from monetary policy during recessions, then over time the average effect could be a wash. However, there is a good chance that the redistributive effects do not average out because business cycles are known to be asymmetric--expansions tend to be long and moderate, while recessions tend to be short and sharp. Since World War II, U.S. expansions have averaged almost six years and recessions less than a year. (2)

More research is needed to determine with great confidence whether the redistributive effects of monetary policy are significant enough that policymakers should explicitly consider their effects. …

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