Bundesbank President Jens Weidmann believes that central banks should not employ monetary policy to pursue distributive aims. “Not only do we lack the democratic legitimacy to do so, the vagueness of the effects also renders monetary policy ill-suited for targeted interventions to tackle distributional issues,” he explained at an international research conference organised by the Bundesbank. Responsibility for this task rested with governments and parliaments, as they had both the democratic legitimacy and the instruments to act, he noted.

Distributional effects of monetary policy vague overall

According to Mr Weidmann, it is particularly difficult to determine the effects of monetary policy on households’ asset and income position, since monetary policy can influence a household’s income and wealth through various direct and indirect channels. Research tends to find, for instance, that unconventional monetary policy measures increase wealth inequality in the short term by driving up asset prices. However, many home owners would also benefit from rising housing prices. In addition, the accommodative monetary policy stance had contributed to higher growth in output, employment and wages. Low-income households were likely to have been the main beneficiaries of this indirect channel, as their unemployment rate had probably declined disproportionately in response, Mr Weidmann explained. Unconventional monetary policy was therefore likely to have reduced income inequality in the short term. However, the medium to long-term impact on wealth inequality was more difficult to assess, he said.

Tracing the net distributional effects of monetary policy may consequently be similar to solving a Rubik’s cube, the Bundesbank President explained. “Each facet sets others in motion. And by isolating one aspect – or trying to fix one side of the cube – one may actually overlook other transmission mechanisms.”

Monetary policy can help alleviate the fallout from the pandemic

By preserving price stability, monetary policy helped to stabilise the economy in times of crisis and to curb unemployment. It also prevented painful scars that would have raised inequality in the longer term, Mr Weidmann said. “In this respect, the Eurosystem’s monetary policy has made an important contribution to alleviating the economic fallout from the current crisis,” he reasoned.

Impact of pandemic on households differs

According to Mr Weidmann, households in Germany have cut their spending dramatically during the pandemic. Their saving rate, meanwhile, has jumped – from 11% in 2019 to 16% in 2020. In a Bundesbank survey, 40% of households had reported that they had suffered income or other financial losses last year. Households with a low income, in particular, reported a loss of income, whereas high-income households saved more as consumption options were unavailable.

In his speech, the Bundesbank’s president expressed his concern that the crisis could result in a rise in inequality. Learning losses as a result of the closure of schools might diminish the later career opportunities of disadvantaged students in particular. In addition, Mr Weidmann explained that the unequal impact of the coronavirus pandemic on the labour market could play an important role. The crisis, the president said, seemed to have hit young people, women and employees with lower incomes especially hard. A report published by the Federal Statistical Office, for instance, showed that higher-income employees are significantly more likely than others to have the option of working remotely. “Given the various labour market-related risks of rising inequality, it is all the more important that we quickly overcome the pandemic and that governments lend the necessary support to households and firms in the meantime.”