A Monetary Policy Tilt for Inequality and Climate Change?
A growing number of economists and advocates are calling on the US Federal Reserve and other central banks to take more account of social and environmental concerns in the design and implementation of monetary policy. The motivation of these critics is obvious amid rising anxiety over global warming and economic inequality in advanced countries. But do such calls merely represent another in the long history of ill-advised attempts to let special interests gain access to the monetary printing press? Many central bankers would say yes, fearing a loss of independence and a dangerous distraction from their core competencies in controlling inflation and fostering economic growth.
But for central bankers to neglect concerns over economic distribution and intergenerational issues can also be dangerous. In addition, the secondary mandates of central banks warrant attention to indisputably important systemic issues like climate change and inequality, and whether these problems can be influenced without detracting from the primary goals of monetary policy.
A closer look suggests that the potential for improvements here is more limited than some have suggested. But central banks have been behind the curve and could make a worthwhile contribution in a number of respects. Indeed, while central bank officials may fear an encroachment on their independence, they cannot afford to ignore reasonable public expectations in these dimensions.
Responding to the global financial crisis of 2007–08, central banks relied on a much wider range of tools than had been in recent use. This activism has prompted questions about the side-effects of some of these policy tools as well as their potential use to promote different objectives. These policy innovations produced noticeable and novel effects on the distribution of income and wealth. For example, while the quantitative easing (QE) program of outright purchases of securities boosted employment and wages, it also increased the price of bonds and other financial assets held disproportionately by or for wealthier households. Also, QE changed the cost of financing for those firms and governments whose bonds were sold.
These responses enhanced the popular political focus on the mandate and tools of central banks. The sharp and sustained rise in the market price of long-term bonds triggered complaints from egalitarians concerned that low-income households lacking sizable holdings of such bonds were unable to reap the advantages gained by large financial institutions. Furthermore, environmentalists noticed that some central bank purchases entailed bonds issued by firms with large carbon footprints.
Three different aspects of these actions have dissuaded central bankers from responding more comprehensively to the effects of QE.
First, they fear entanglement with politicians with conflicting goals that might undermine the autonomy and focus of the central bank while diverting monetary policy away from its primary goals.
Second, they judge that the distributional and environmental impact of monetary policy has been much smaller than alleged by their more strident critics.
Third, they fear that using policy tools to meet objectives not explicitly stated in their mandates could, in a democracy, become legally and ethically problematic. After all, it may be an ethical abuse for public servants to use the powers granted to them for purposes not sanctioned or envisaged by—and potentially encroaching on the realm of—the democratic legislator.
None of these arguments is fully convincing. Most central banks have an explicit secondary mandate to use their power to support wider goals of economic policy. Even a central banker who is personally uninterested in the goals of a more equal and environmentally sustainable economy needs to be aware that for a central bank to underperform on that secondary mandate is to risk exposure to increasingly sustained attacks on their independence, which could hamper achievement of their core objectives.
A growing literature does suggest that the side-effects of QE on inequality and on climate change cannot have been great. A 10- or 20-basis-point difference in the funding cost for large carbon-intensive firms, for example, will not have been decisive. But as central banks and financial regulators are encouraging private financial institutions to go beyond conventional risk assessments in assessing the financial risks of exposure to climate-sensitive firms, should this not also, at the very least, have been applied to their own asset purchases?
The impact of QE on inequality may have been positive in the euro area. Going further to make direct autonomous “helicopter money,” or unrequited cash transfers to the general public, is considered a step too far by almost all central bankers. But more socially progressive monetary policy options on inequality could be used in times of very low interest rates. A leading candidate would be “helicopter money through the budget” where government transfers or other spending programs are underpinned by an autonomous decision of the central bank to ensure crowding out does not ensue.
It is important not to overstate what central banks can do. For this reason, and also because of the complex tradeoffs involved, it would be undemocratic and usually of limited effectiveness to leave achievement of goals on these nonmonetary policy dimensions solely or even largely to the central bank. The government cannot abdicate its role here. If the central bank is to do more, it needs a clearly articulated relationship with the government to address these issues in a way that does not compromise the independence needed for central banks’ core mandate.