Monday, January 18, 2016

Monetary Policy and Inequality

In recognition of Dr. King's birthday, Narayana Kocherlakota is typically provocative. According to him, monetary policymakers pay insufficient attention to questions of economic inequality, and policy would be better if they were more cognizant:
...the Federal Reserve Act’s vision of economic diversity is largely regional and sectoral in nature. [But, as]...we all know all too well, race matters: the average African-American’s experience with the US economy is very different from that of the average white person’s. I believe that the Committee’s deliberations would be even stronger if they took more account than they did in 2010 of this essential source of heterogeneity in our nation’s economic life.
What Narayana means is that an average African American is more likely than the average non-African American to attend a below-average public school, be incarcerated, die at an early age, suffer unemployment, have low income, and have low lifetime wealth. And some of these problems are particularly acute for male African Americans.

Do monetary policymakers pay no attention to these problems? Certainly, that's not the case.

1. Every three years the Fed conducts the Survey of Consumer Finances, or SCF. The SCF data is then available to the public, and is widely used by researchers both inside and outside the Federal Reserve System. Here's an example of a paper, done at the Board in Washington, that studies the racial wealth gap using SCF data.

2. At the St. Louis Fed, we have an extensive program in place that centralizes economic data (FRED) and historical data and documents (FRASER). Both of these facilities allow people to explore issues of economic inequality on user-friendly platforms (addendum: and there's also the Center for Household Financial Stability at the St. Louis Fed, as Christian has reminded me in the comments section - sorry folks). The Kansas City Fed also has a new data facility that is available to researchers.

3. The Fed has hosted conferences on inquality, and the effects of monetary policy on inequality in income and wealth. For example, this conference in 2014 at the Boston Fed featured a speech by Janet Yellen, on "Perspectives on Inequality and Opportunity from the Survey of Consumer Finances" (there's the SCF again). As well, the Fed has partnered with the Council on Economic Policies to host conferences at the Atlanta Fed and the St. Louis Fed. As well, the 1998 Jackson Hole Conference was addressed specifically to issues of inequality.

How much attention should Fed policymakers direct to problems of inequality? Certainly the ongoing data collection and research reflected in the above activity reflects an interest in knowing the answer to that question. But, the consensus view on the role of economic inequality in monetary policy decisions is stated well in this paper by Makoto Nakajima at the Philly Fed (see 2nd quarter 2015):
The Federal Reserve conducts monetary policy in order to achieve maximum employment, stable prices, and moderate long-term interest rates. Monetary policy currently implemented by the Federal Reserve and other major central banks is not intended to benefit one segment of the population at the expense of another by redistributing income and wealth. Any decisions regarding redistribution are considered to be the province of fiscal policy, which is determined by elected policymakers. However, it is probably impossible to avoid the redistributive consequences of monetary policymaking.
In other words, the Fed is constrained by its mandate from Congress, which gives the Fed specific goals - price stability and maximum employment. Further, the Fed was set up as an institution that is independent of Congress, but with some political control, in particular through the appointment of the Board of Governors, and approval by the Board of appointments of regional Fed Presidents. It is hard to deny that monetary policy has distributional consequences, and we need to understand these. But, the Fed needs to be wary of stepping outside of its Congressional mandate.

That said, given our current understanding of monetary policy and its effects, any consequences of monetary policy for the income and wealth distribution are temporary, and perhaps small. So, my advice for any young person who is concerned about poverty in America and wants to do something about it, is that central banking is probably not the job for you. For example, suppose that, in 1988, Barack Obama had decided to go to MIT for a PhD in economics, instead of going across town to Harvard for a law degree. Then, suppose that things had gone really well for Obama as an economist, and that he was appointed as Fed Chair in 2009 (through some unusual circumstances of course) instead of taking office as President. Surely, President Obama's two terms as President have had a much larger effect on inequality in the United States, and in particular on the wellbeing of African Americans, than anything he might have done as Fed Chair.


  1. Maybe Kocherlakota was thinking along these lines :

    “The economy may not revert to its pre-crisis average levels of growth and interest rates. But many of the models we use in policy analysis do revert to pre-crisis averages, because persistent effects from the 3Ds are ruled out BY DESIGN. ” ( my caps )

    Debt, Demographics and the Distribution of Income: New challenges for monetary policy


    1. We would have to get Narayana to tell us if that is what he is thinking about. I agree with this:

      " many of the models we use in policy analysis do revert to pre-crisis averages"

      I know of one in particular, whose name I won't mention, that has exactly that property - everything reverts to trend, and trend is exogenous. But, the people I work with tend to think that the 3 Ds matter.