Any distributional effects on credit of macroprudential policies are only one part of the distributional story. Relatively little is known about how such policies affect the income distribution in the longer term via their role in preventing crises or mitigating their severity. Our paper helps to fill that gap in the literature by looking at the impact of past recessions and crises on inequality, and the amplifying roles of credit and capital within that. This helps to shed light on the distributional implications of not intervening – in the form of an amplified recession. We find that inequality rises following recessions and that rapid credit growth prior to recessions exacerbates that effect by around 40%.
The COVID-19 pandemic has rapidly spawned a literature analysing its impact on macroeconomic aggregates. But there’s also been work that seeks to look at heterogeneity of impacts across industries, households and individuals. This post summarises this literature which seeks to better understand the heterogeneous effects of the pandemic and associated policy responses on income, hours worked and employment status.
Following the onset of the financial crisis, the Monetary Policy Committee (MPC) cut interest rates to historically low levels and launched a programme of quantitative easing (QE) to support the UK economy. How did this exceptional period of monetary policy affect different households in the UK? Did it increase or decrease inequality? Although existing differences in income and wealth means that the impact in cash terms varied substantially between households, in a recent staff working paper we find that monetary policy had very little impact on relative measures of inequality. Compared to what would have otherwise happened, younger households are estimated to have benefited most from higher income in cash terms, while older households gained more from higher wealth.
Inequality sits near the top of Western politicians’ agendas and exercises the minds of academic economists and policymakers alike. While attention to the living standards of the poorest is warranted, I argue that the current focus on inequality is misplaced for two reasons: first, because inequality of outcome is of second-order economic importance compared to improving absolute living standards; and second, because it shifts attention away from tackling the inefficiencies caused by rent-seeking. Addressing these via institutional reforms would foster growth, raise the living standards of the poorest, and, as a by-product, reduce inequality.