Are central banks fueling inequalities? This is how the BIS sees it.
There is considerable debate over whether low interest rates help reduce inequality – by promoting economic conditions conducive to hiring – or by exacerbating them, by fueling the prices of assets that tend to belong. to the rich in the first place.
At the very least, central banks know about it.
Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, calculated the percentage of speeches mentioning inequalities. Barely mentioned before the 2008 financial crisis, they now represent around 9% of all speeches.
Borio says rising inequality is not blamed on central banks, but rather on technology and globalization. “Technology is believed to have increased inequalities by increasing the demand for skilled versus unskilled; and globalization, by displacing entire swathes of workers who are losing their comparative advantage, ”he says. Structural causes can only be resolved with structural remedies, such as improved health, education, and antitrust legislation. Fiscal policy, through taxes and transfers, can and does reduce inequality.
As for what central banks can do, they can tackle excessive inflation first – income inequality declined in the 1980s after inflation fell below 5% in many emerging economies. Higher inequalities can also exacerbate recessions, as the BIS has found that the depths of recessions are worse in countries with high inequality. “A plausible explanation is that richer people have a lower marginal propensity to consume, while poorer people may find it more difficult to borrow when interest rates fall, as they may face constraints. tighter credit than their richer peers, ”says Borio.
BIS research reveals that financial factors play a bigger role in business fluctuations. “In large part because the economy has to grapple with the legacy of financial imbalances that have accumulated during the previous generally longer expansion,” Borio explains. “Balance sheets – of households, businesses and banks – need to be repaired. Debt and excess capital must be settled. The credit must be reallocated. In the process, expenses are reduced and the supply of finance reduced. “
The BIS findings do not dismiss the accusation that central banks can fuel inequality by being more aggressive. “With inflation expectations firmly anchored and inflation less responsive to the economic downturn during expansions – a flatter Phillips curve – central banks may have been able to push harder. This further stimulates employment and therefore reduces income inequalities, in the short and medium term, ”explains Borio. “But by potentially contributing to risk-taking and the accumulation of financial imbalances, it increases the risk of a financial recession in the future, with its greater consequences on inequality.”
Borio says this highlights the need to put in place what he says is a “more holistic” macro-financial stability framework.