Agustín Carstens on Central Banks and Inequality

Video & Slides

On Thursday, May 6, Agustín Carstens joined Markus’ Academy for a lecture. Carstens is the general manager of the Bank for International Settlements.

Watch the full presentation below and download the slides here. You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

• Income inequality has been on the rise since the 1980s. The increase in inequality is much steeper in advanced economies, likely due to long-run structural forces. It is not primarily a monetary phenomenon. Thus, these forces are best corrected by public policies, such as fiscal and structural policies. For monetary policy, rising inequality weakens the transmission of monetary policy and therefore needs to be taken into account. In addition, central banks that keep interest rates low may benefit households that hold more equity in their portfolios and thus increase inequality. There is a tradeoff, however, between short-term costs of low interest rates in terms of wealth inequality  and long-term benefits from mitigating recessions, protecting employment and reducing income inequality. 

• Central banks, as public institutions, have the goal of  ensuring macroeconomic stability, which  provides the best foundation for an equitable society. Inflation itself is one of the most regressive taxes as it disproportionately hits the most disadvantaged households who are least able to hedge against inflation. In addition, taming prolonged inflation can bring on recessions, which further exacerbate inequality. On the other hand, controlling inflation stimulates growth and creates better job opportunities, helping better distribution of income. 

• Changes in recent decades have created a more challenging environment for monetary policies. First, the Phillips curve is becoming flatter and, as a consequence, monetary policy needs to be more proactive for inflation to hit the target. In addition, financial factors have played a more important role and amplified business cycle fluctuations —  recessions have become more severe, taking a larger toll on inequality. Thus, monetary policy can help control the impact of recessions by contributing to overall financial stability.

• Other policies need to play a complementary role with monetary policy to help foster sustainable growth. For example, during an expansion phase, monetary policy can focus on near-term price stability at the same time macroprudential measures can slow down financial expansion in risky sectors. During recessions, central banks can act as lenders and market makers of last resort while fiscal backstops are needed to stabilize the overall financial system. 

• Fiscal and structural policies are needed to address longer-term forces driving trends in inequality. Fiscal policies, such as taxes, substantially impact income inequality while structural policies can tackle the root causes of inequality.  Central banks can also contribute to a more equitable society while performing the non-monetary functions attributed to them by law — as promoters of financial inclusion and development, consumer protection and efficient payment systems. 

• In conclusion, while inequality is not a long-run monetary phenomenon, central banks can contribute to a more equitable society by fulfilling their mandates.