Working Paper

Central banks and distribution

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Income and wealth inequality have been rising in the past three decades. Surprisingly, inequality has been largely ignored in the literature and practice of monetary policy. However, due to the crisis, this question has been gaining more attention.

Recent studies have shown that unconventional monetary policy implemented to fight the Great Depression in advanced economies has significant distributional effects and tends to exacerbate inequality. This poses a challenge for central banks. Not the least because increasing inequality is likely to affect monetary policy’s transmission mechanism, thereby reducing the effectiveness of monetary policy.The first section of this paper presents a critical appraisal of the traditional view of central banking which has neglected the relation between distribution and monetary policy. The second section challenges this view and presents the increasing evidence showing that monetary policy exerts significant effects on distribution, particularly in the euro zone. The third section provides some answers to the question of how central banks should respond to growing inequality and its relationship to monetary policy.