• Rate cuts can reduce unemployment and boost household incomes
  • Monetary policy as a whole has weak distributional effects

Claims that loose monetary policy leads to greater inequality are “very doubtful,” and low interest rates might actually reduce income disparities, a Bundesbank study shows.

“The commonly encountered statement that monetary-policy measures are proven to increase inequality cannot be substantiated,” according to the research in the German central bank’s monthly report on Monday. “It is derived from observations that are based on unreliable generalizations, neglect delayed-distribution effects, and aren’t based on the right reference parameters.”

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The findings won’t make for easy reading in Germany, home to some of the loudest opponents of the European Central Bank’s ultra-loose monetary measures, with critics alleging that low rates expropriate savers and lead to old-age poverty. German Finance Minister Wolfgang Schaeuble said earlier this year that the current monetary-policy regime has stoked distrust of European institutions and handed fodder to populist groups.

Bundesbank President Jens Weidmann, one of two Germans on the ECB’s Governing Council, has previously reminded his compatriots that they “are not just savers: they’re also employees, taxpayers, and debtors, as such benefiting from the low level of interest rates.”

Weak Impact

Part of the problem in making assertions about the influence of policies on inequality, according to the study, is that central banks generally respond to given economic parameters -- making it difficult to distinguish which effects stem from their actions and which are caused by the economy. Understanding the impact would also require knowing how the situation might have developed without monetary policy action.

By drawing on a range of studies, the Bundesbank tries to show that monetary policy generally has a weak impact on inequality, and that low interest rates sometimes even contribute to closing the earnings gap.

People who actively trade in financial markets might benefit from interest-rate changes, while households heavy on cash might lose out. Simultaneously, the decrease in unemployment that typically accompanies expansionary policy particularly benefits lower-income brackets. Cheaper loans also benefit debtors.

The report notes that income equality cannot be a goal for a central bank that has a mandate to ensure price stability, but that it can’t be ignored either.

“The distribution situation impacts the effectiveness of monetary measures,” it states. “It is very doubtful that expansionary monetary policy measures have increased overall inequality in recent years.”

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