During the COVID-19 pandemic when markets were in a tailspin, the U.S. Federal Reserve stepped in to lower its benchmark interest rate to help stabilize the economy and make it easier to borrow money.
Even still, the pandemic has had a profound effect on inequality — research shows that the economic costs of COVID-19 were concentrated on some of the least fortunate people in society.
These developments raise important questions. Should central banks help address inequality, and if so, how? A panel of banking officials from the U.S., Malaysia, and Finland unpacked these complicated issues at the 2021 annual meeting of the Central Bank Research Association hosted by the MIT Golub Center for Finance and Policy.
“The pandemic has … raised awareness of the role of macroeconomic policies in promoting inclusive growth and mitigating inequality,” said moderator a global economics and management professor at MIT Sloan who has served as governor of the Central Bank of Cyprus and a member of the Governing Council of the European Central Bank.
During the panel, experts discussed what role a central bank should play, the relationship between interest rates and wealth, and how partnering with other organizations can help. Some of their thoughts:
What is the role of a central bank?
Some speakers said that the job of a central bank is first and foremost to set monetary policy, and by doing so, this will help even the playing field for everyone involved.
James Bullard, president and CEO of the Federal Reserve Bank of St. Louis, said that above all, the focus of monetary policy should be to keep credit markets running smoothly “because everyone needs them to be functioning well in order to get the best allocation of resources.”
Other panelists took a more expansive view. Olli Rehn, governor of the Bank of Finland, said that monetary policy should be used to stimulate economic activity and assist in saving and creating jobs, especially during times of crisis.
“Overall, the easing of monetary policy has assisted in diminishing inequality in recent years in the Euro area, especially via increased employment for lower-income households,” he said, noting that 12 million jobs were created in Europe during the COVID-19 crisis and that monetary policy “significantly contributed” to that progress.
“Cooperation between monetary and fiscal policy in the crisis response has helped to reduce long-term job losses and bankruptcies,” Rehn said, thus contributing to “the overall wellbeing of the public.”
Zeti Aziz, former governor of Bank Negara Malaysia, Malaysia's central bank, noted that in emerging economies, central banks have more than one objective and have a “significant role” in addressing access to financial services and bringing lower-income groups into the financial mainstream.
“Most central banks in emerging economies actually have multiple mandates,” Zeti said. “In addition to the monetary and financial stability, there is the mandate to develop the financial system, to develop the domestic financial markets, the payment system, and the financial infrastructure that would best serve the economy, while also promoting a balanced and inclusive growth that is sustainable.”
How do interest rates affect inequality?
Some argue that low interest rates increase asset prices, which benefits asset holders and the economy, while others say that low interest rates help the lower end of the income distribution by changing unemployment dynamics and boosting growth to the economy.
Zeti noted that when interest rates are low and the stock market is doing well, “this creates wealth for the higher-income groups that own stocks and shares and that have stakes in large corporations and in the financial services.”
It also contributes to increased disparity among poorer individuals and the unbanked. There is “a linkage between highly accommodative monetary policy and more pronounced income inequality,” she said.
Bullard acknowledged that it’s not easy reaching consensus on the issue of interest rates.
“Are the low interest rates helping poor people, or are low interest rates helping rich people? I think we need to get clarity on which one is it,” he said. “There's a powerful argument on both sides. We need models that will help disentangle that.”
Should central banks be proactive in partnering to help address inequality?
Bullard noted that Federal Reserve banks have partnered with other institutions in the banking sector as well as with nonprofits to establish community development programs and programs directed toward financial inclusion. However, he noted that these initiatives by intent do “not cross over to monetary policy itself.”
Zeti said the responsibility of addressing inequality shouldn’t fall solely on the central bank. The central bank should interface with other agencies but establish clarity on who is responsible for what, she suggested. Doing so will create greater accountability.
“There is no shortcut solution for addressing rising inequalities,” Zeti said, but doing so is crucial. This is to secure “the economic prospects of every segment of society” and thereby achieve the “S” in the environmental, social, and governance agenda.
“Very often, we talk about the E and the G, but the S is equally important,” she said. “It is about the economic wellbeing of the overall population.”