The distributional footprint of monetary policy
Claudio Borio discusses the nexus between inequality and monetary policy, as outlined in Chapter II of the BIS Annual Economic Report. Long-term trends in inequality are not a monetary phenomenon, but there is a lot that monetary policy can do to foster a more equitable distribution over business cycles.
The nexus between monetary policy and inequality has attracted attention since the Great Financial Crisis. By keeping interest rates unusually low for unusually long to engineer a recovery and raise inflation, central banks have contributed to the perception that they have been raising inequality. But understanding the nexus requires a more holistic analysis. Long-term trends in inequality are not a monetary phenomenon: they reflect structural forces that are beyond the reach of monetary policy. Nevertheless, it can do a lot to foster a more equitable distribution over business cycles: its mandate requires it to tackle the major sources of inequality over business fluctuations: price, macroeconomic and, hence, financial instability. Changes in the nature of the business cycle have complicated this task, calling for greater support from other policies.
