The Agenda

The Impact of Contractionary Monetary Policy on Inequality

Econbrowser has a post by Olivier Coibion (UT Austin), Yuriy Gorodnichenko (UC Berkeley), Lorenz Kueng (Northwestern) and John Silvia (Wells Fargo) that summarizes their recent research on how monetary policy influences income and consumption inequality: 

While there are several conflicting channels through which monetary policy may affect the allocation of wealth, income and consumption, our results suggest that, at least in the U.S. between 1980 and 2008, contractionary monetary policy actions tended to raise economic inequality or, equivalently, expansionary monetary policy lowered economic inequality.

So what does this mean for a period in which nominal interest rates are at the zero bound?

Nominal interest rates hitting the zero-bound in times when the central bank’s systematic response to economic conditions calls for negative rates is conceptually similar to the economy being subject to a prolonged period of contractionary monetary policy shocks. Given that such shocks appear to increase income and consumption inequality, our results suggest that current monetary policy models may significantly understate the welfare costs of zero-bound episodes.

I’d be eager to read Scott Sumner and Ashwin Parameswaran on these findings.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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