10 questions and answers about the distributional effects of monetary policy

Economic Commentaries, News How is the coronavirus crisis affecting the distribution of income in Sweden? Have the low interest rate and the Riksbank’s purchases of assets widened or narrowed the spread of incomes and wealth? What could happen if monetary policy tried to influence distribution? These are some of the issues that Björn Andersson, Mikael Apel and Iida Häkkinen Skans discuss in an Economic Commentary.

Income disparities have remained roughly unchanged since 2015, but have increased in the longer term. The increased income disparities are due to the incomes of those who are not working having increased much less than wage incomes, while capital incomes have increased significantly for those with the highest incomes. The coronavirus pandemic is likely to increase income disparities. It is more difficult to analyse what has happened to the differences in wealth in Sweden because there have been no statistics since 2007.

An expansionary monetary policy affects the economy broadly. A fall in interest rates has an effect on the economy that, in principle, benefits all households but in different ways and to different degrees. Higher asset prices mean, among other things, that income from capital gains increases and that this goes to people at the top of income distribution to the greatest extent. The fact that more people are employed and receive wage income instead of different kinds of benefits means that income increases to a relatively large extent for people in the lower part of the income distribution. It is therefore difficult to know what the overall effect on the income distribution  will be.

The Riksbank does not have an assigned  task connected to distribution policy other than that of keeping prices stable, which does, in fact, include a distribution dimension. This is because high and volatile inflation would cause arbitrary redistribution of income and wealth. The active use of monetary policy for distributional policy purposes would be difficult for several reasons, not least because it affects the economy broadly. A less expansionary monetary policy could certainly contribute to slowing down asset prices but this would be at the cost of higher unemployment. Although the overall final result could be a more even distribution, the situation would, in practice, be worse for groups that are already weak.

Read more in the Economic Commentary “10 questions and answers about the distributional effects of monetary policy”.

By Björn Andersson, Mikael Apel and Iida Häkkinen Skans, who work at the Monetary Policy Department of the Riksbank.

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Updated 09/06/2021