SPEECH
SVERIGES RIKSBANK
DATE:
7 April 2017
SE-103 37 Stockholm
(Brunkebergstorg 11)
SPEAKER:
Deputy Governor Henry Ohlsson
VENUE: Swedish Trade Union Confederation, Stockholm
Tel +46 8 787 00 00
Fax +46 8 21 05 31
registratorn@riks bank.se
www.riksbank.s e
The distributional effects of monetary
policy
"Price stability is a prerequisite for sustained economic growth as well as full
employment and it prevents an arbitrary redistribution of income and wealth."
This is how the Riksbank concluded its press release on 15 January 1993, when the
inflation target was announced. The link between monetary policy, growth and
employment has been very much in focus over the almost 25 years that have
passed since then. The distributional effects of monetary policy, on the other
hand, have been more or less overlooked, until the question came into the
spotlight again in recent years.
When the Riksbank decided in early 1993 to begin steering its policy towards an
inflation target, it was starting from a period when the major problem had been a
high rate of inflation and also a rate of inflation that fluctuated substantially from
one year to the next. Having a high inflation rate is as we know a problem in itself,
but it also becomes more difficult for households and companies to make
financial decisions, as the real value of savings, investments and debt is affected
by large fluctuations in inflation. If inflation is higher than expected, borrowers
benefit from the value of the debts being eroded, while lenders and those with
large savings are correspondingly disadvantaged. This type of arbitrary
distribution between lenders and borrowers was common during the 1970s and
1980s.
The inflation target, together with the reforms of the fiscal policy framework and
the changes in wage formation in the 1990s, has contributed to inflation in
Sweden both coming down to a lower level and becoming more stable than
before. The same has happened to inflation rates around the world. It is therefore
not surprising that the question of the distributional effects of inflation and
monetary policy disappeared from the economic policy debate.
Distributional effects topical again
However, in recent years the question has become topical again. One reason for
this is a growing insight that the distribution of income and wealth may have
considerable significance for the effects of monetary policy on the economy as a
whole. And it is therefore important to understand the relationships better.
Another reason why this has become topical again is the rising asset prices and
the effect that monetary policy has on the distribution of income and wealth.
We have gone through a long period where inflation has been low and central
banks around the world have struggled to bring inflation back up to their
respective target levels. One might therefore think that the question of monetary
policy's distributional effects has become topical because inflation has been
higher than expected, which has benefitted some groups at the cost of others. But
this is not actually the main reason; instead it is the efforts the central banks have
made to increase activity in the economy and to bring up inflation.
Low interest rates have contributed to a rapid rise in prices of shares and other
assets, both financial assets and real assets. This effect in itself should be
inconspicuous. Asset prices normally rise when interest rates fall, which occurs in
periods when monetary policy stimulates the economy. However, recent years
have been special in many ways. Apart from policy rates being low for an
unusually long time, the Riksbank and other central banks have also used other
methods to further push down the general interest rate level, for instance
purchases of government bonds. The monetary policy measures have affected
asset prices in a more direct and visible manner than the conventional policy of
interest-rate cuts. This has contributed to more discussion of the distributional
effects of monetary policy.
The distributional effects of the central banks' asset purchases have been in focus
in, for instance, the United States, the United Kingdom and in Germany, where
there has been considerable discussion of the effects of low interest rates for
savers.1 In Sweden, the Riksdag Committee on Finance has included distributional
effects in the questions that are to be included in the ongoing review of the
monetary policy framework and the Sveriges Riksbank Act - in the terms of
reference for the review it says that the committee making the review shall
consider in particular whether the Riksbank should give consideration to the
consequences that conventional and unconventional monetary policy may have
on, for instance, the distribution of income in the economy.2
Explaining why the distribution of income and wealth changes is a challenge that
is not made easier by the fact that the statistics in some cases lag behind and in
other cases have large gaps. Those of you who have read Piketty's best-seller
Capital in the Twenty-First Century also know that one can give the question of
distributional effects much greater room than I have scope for today. What I want
to say with these reservations is that those of you who are expecting to hear
exactly how great the distributional effects of monetary policy have been will
unfortunately be disappointed. My somewhat more modest aim is to make a
contribution to the discussion by examining the distributional effects of the policy
and adding shades of meaning to these effects.
What I hope to convince you of today is that monetary policy also affects
household income and wealth in ways that are more indirect, but probably more
meaningful, than via asset prices. While an expansionary monetary policy entails
rising asset prices in the short term, this is compensated by lower unemployment,
higher employment and stronger growth. A monetary policy that succeeds in the
task of attaining price stability also counteracts the negative distributional effects
of inflation.
An expansionary monetary policy to defend
the inflation target
But, as I said, rising asset prices have been an element of the economic upturn in
recent years. And during periods when stock prices are rising, the income
distribution is more uneven between households - this can be seen from standard
measures of dispersion of the income distribution, such as the so-called Gini
coefficient (see Figure 1).
Figure 1. Gini coefficient for disposable income and stock market movements
0.32 650
Stock index (right scale)
Gini, excl. capital gains (left scale)
Gini, incl. capital gains (left scale)
0.30 550
0.28 450
0.26 350
0.24 250
0.22 150
0.20 50
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Note. The Gini coefficient is a measure of statistical dispersion of, for instance, incomes. The Gini coefficient can
be between 0 and 1, where a higher value entails greater inequality. The figures are from Statistics Sweden's
surveys Household finances 1995-2011 and Income and tax statistics 2011-2015.
Sources: Macrobond and Statistics Sweden
As I mentioned earlier, there is nothing unusual in asset prices rising during
periods when monetary policy is stimulating the economy. On the other hand, it is
of course unusual that monetary policy has stimulated the economy to this extent
and that the Riksbank has not eased up on the accelerator as economic activity
has continued to increase and asset prices have risen. So a natural first question
is: why has monetary policy been this way?
The short answer is: because the inflation target is worth defending. You have
heard my colleagues on the Executive Board and I say it many times before, but it
is worth repeating. From my perspective, the inflation target of 2 per cent has
played a central role in the Swedish economy - and I am sure I share this opinion
with many of you here today. We have had considerable benefit of households
and companies, savers and investors, expecting a future rate of inflation that is on
a reasonably low level and that their expectations are more or less consistent with
one another. This has contributed to a completely different stability in
pricesetting and wage formation over the past two decades than in the two decades
prior to this, which has in turn contributed to inflation falling at the same time as
we have had more stable and much higher real wages on average. That high and
fluctuating inflation has disappeared as a disturbing factor should also have meant
that financial decisions by households and companies have in general become
simpler and better.
But the key to this type of development is a joint anchoring of inflation
expectations and a condition for this is that the inflation target of 2 per cent is
perceived as credible. This is the problem that has marked the Riksbank's
monetary policy in recent years. In January 2015, when I became a member of the
Executive Board, we were in an unfortunate situation where inflation
expectations in the longer run were losing their anchorage around the 2 per cent
target. Monetary policy had been expansionary for a long time and further
measures were needed to strengthen confidence in the target and to send very
clear signals about the Riksbank's intentions to bring inflation back to 2 per cent.
But how can this be done in an environment where interest rates are already very
low to start with? It is important to remember that there has long been a trend
with falling interest rates around the world - a trend that has nothing to do with
monetary policy, but rather concerns ageing populations and other structural
factors that have pushed up savings in relation to willingness to invest. In the
midst of this the central banks have also had to manage the effects of the
financial crisis and a protracted economic slump. Many of them, including the
large central banks like the ECB and the Federal Reserve in the United States, have
conducted an expansionary monetary policy to support the recovery and bring up
inflation, both via very low policy rates and via more unconventional measures
such as various asset purchase programmes. Monetary policy in Sweden has also
needed to take this into account.
So to safeguard the upturn in economic activity and inflation in Sweden and to
turn around the negative trend in inflation expectations, we have cut the repo
rate down to a negative level, and with effect from the beginning of 2015 we have
implemented an asset purchase programme to make our monetary policy even
more expansionary. Our assessment is that this monetary policy has by and larger
been successful. Market rates have followed our cuts in the repo rate and become
negative. And the bond purchases seem to have pushed down interest rates more
or less in the way we expected.
Monetary policy also seems to have had the desired effect on inflation and
inflation expectations. The upturn in inflation that began in 2014 has continued,
and the downward trend in long-term expectations has turned into an upward
trend since the beginning of 2015. Another sign that the expansionary monetary
policy has had an effect is that we have had strong economic activity in Sweden.
Growth has been high and employment has increased.
Monetary policy's distribution effects are
difficult to disentangle
At the same time as the expansionary monetary policy has contributed to the
economic upturn, asset prices have risen. They can be affected by monetary
policy through several different channels. Lower policy rates mean that bond
yields become lower, at the same time as prices of bonds rise. If the central bank
also purchases bonds, this puts further downward pressure on yields and further
upward pressure on prices. Those selling the bonds to the central bank may also
wish to adapt their portfolios and buy other assets, which means that the prices
of these assets will in turn rise. The central bank can also, by means of various
types of communication on monetary policy, make it clear that the expansionary
policy will continue for a longer period of time, which can contribute to a more
positive view of activity in the economy. This can in turn contribute to asset prices
rising.
The Riksbank and other central banks are well aware of all of these channels.
Expansionary monetary policy affecting asset prices in this way is actually a part of
the transmission mechanism for monetary policy, that is, the way that monetary
policy spreads through the economy. But the effect on asset prices is not the
objective of the policy. The objective is that the expansionary policy - through the
effects on interest rates, asset prices, exchange rate, access to credit,
expectations and so on - will in a couple of years contribute to increasing activity
in the economy and bringing up employment and inflation. It is important not to
lose this perspective in discussions of the distributional effects of monetary policy,
as it broadens the spectrum of effects to more than just those coming through
asset prices. Moreover, it points to the difficulties in determining the size of the
distributional effects of monetary policy.
One such difficulty is assessing what should actually be considered an effect of
monetary policy and what is rather an effect of the conditions for monetary policy
having changed. In a system like the national economy, it is not an easy task to
distinguish between cause and effect. The Riksbank does not operate in a
vacuum; it adapts its monetary policy to changing circumstances.3 Moreover, if
monetary policy were not adapted to new circumstances, this would also have
distributional effects. It is therefore not entirely correct to compare the income
and wealth distribution after a period of expansionary monetary policy with the
distribution prior to these measures being taken. The point of comparison should
rather be how the distribution would have looked without the expansionary
monetary policy.
Another difficulty is what time perspective one should have to determine the
effects of monetary policy. I have argued that it is important to take into account
the total effect of monetary policy on the economy. Asset prices are affected
relatively rapidly, but it takes time before the total effect of monetary policy has
an impact on the real economy and ultimately inflation. Moreover, a common
starting point when discussing the effects of monetary policy is that in the long
term it is neutral with regard to real economic quantities such as growth,
unemployment and income distribution. In this perspective, one can therefore
argue that monetary policy should only have minor distributional effects, if any at
all. The effects of an expansionary monetary policy during economic slumps
should be counterbalanced by the opposite effects of a tight monetary policy
during booms.
It may of course be reasonable to take as a starting point that monetary policy is
neutral in the long run. But there are factors that may point to a need to
modulate this starting point. Some research results indicate that the effects of
expansionary and contractionary monetary policy are not necessarily
symmetrical.4 There are also mechanisms that make the risk of staying
unemployed increase the longer one is unemployed. Add to this that the income
profile over the life cycle improves considerably if one has a job. This could mean
that there are motives for conducting a relatively more offensive monetary policy
in economic recessions. But here more research is needed to gain a deeper insight
into the causes and scope of this type of persistence effects on unemployment
and what these effects mean for monetary policy.
Monetary policy affects incomes from
different sources
The effects of monetary policy on income and wealth distribution are in other
words rather difficult to disentangle. But let us look at some different ways in
which the expansionary monetary policy conducted in recent years may have
affected the income distribution. An appropriate starting point could be the
functional income distribution of GDP. As we know, GDP can be measured from
different sides, for instance as the total of all factor income. Somewhat simplified,
the income comes from two main sources: remuneration to the labour force in
the form of wages and other benefits and remuneration to capital in the form of
yield and profits. Both of these types of remuneration have increased over the
past three years, and GDP has increased by a good three per cent on average in
real terms. But the question is how the growing incomes have been distributed
among households.
Households differ with regard to the size of the income they receive from
different sources. In general, labour income is in relative terms the most
important source of income for households in the lower and middle parts of the
income distribution, while capital income has the most significance for those at
the top - particularly the very top - of the distribution. As monetary policy affects
wages and capital income in different ways, the overall effect may differ from one
household to the next. It is this channel from monetary policy via the composition
of household income on which the debate has focused the most - rising asset
prices should have benefitted households at the top of the income distribution to
a relatively large degree and thus contributed to a greater income dispersion.
Higher asset prices, lower yield and cheaper
loans
However, households do not only differ with regard to the composition of labour
and capital income. There are also relatively large variations between households
with regard to the distribution of capital income from capital gains, yield and
interest on different types of asset and liability. The effect of an expansionary
monetary policy on income and wealth distribution can thus vary for this reason,
too.
Households' capital incomes may, for instance, differ in their sensitivity to
changes in interest rates. All else being equal, low interest rates benefit
household with relatively large debts as interest payments become lower.
Households with bank savings are correspondingly disadvantaged and households
with relatively large interest-bearing assets thus have a lower yield. Here the
maturity of the different assets and liabilities also plays a role. If, for instance,
mortgages are mainly at fixed interest rates, the effect of interest-rate cuts will be
less than if the loans are primarily at variable rates. A comparison between
different income groups shows that liabilities as a percentage of disposable
income are more than 250 per cent in all groups in Sweden (see Figure 2). With
the exception of the group with the lowest income, however, there is generally
little difference in the debt-to-income ratio between the groups.
Figure 2. Debt-to-income ratio in different income groups 2016
Percentage of disposable income
400 400
350 350
300 300
250 250
200 200
150 150
100 100
50 50
0 0
1 2 3 4 5 6 7 8 9 10
Note. The columns show the median in each decile group. Data for July 2016. The high debt ratio in the lowest
income group should be interpreted with a certain amount of caution, as this group includes, among others,
households with highly varied incomes, for example households with negative income.
Source: The Riksbank
In addition to households having different sizes of assets and liabilities that are
affected by interest rates to different degrees, there may also be other
dimensions that play a role in how the distribution of income and wealth is
affected by a period of very expansionary monetary policy. For instance, one can
imagine that household that are used to managing their assets and liabilities have
better conditions for safeguarding themselves against or benefitting from the
effects of monetary policy on interest rates and asset prices.
However, the distributional effects of monetary policy do not come solely through
changes in nominal interest rates and asset prices. Ultimately, it is the effect when
consideration is given to inflation that is important. And the composition of
household wealth is also significant in this context. To begin with, households are
more negatively affected by an expansionary monetary policy that increases
inflation if they have a relatively large share of assets that have poor or little
protection against inflation. Cash is of course the most obvious example, even if it
may in this context be of less significance for the wealth distribution, given how
the use of cash has declined in Sweden.
The real value of all assets and liabilities is of course affected by how high inflation
is and I have earlier mentioned the redistribution between borrowers and lenders
as an effect of an unexpectedly high or low inflation rate. An unexpected increase
in inflation, for instance, that monetary policy has become more expansionary
than expected, reduces the real value of assets and liabilities. This can, for
instance, benefit households with relatively large debts on houses and
apartments, but disadvantage low income households who rent their homes.
Households with large financial assets are also disadvantaged, but they are
perhaps more used to, and better able to, adapting their assets to avoid the
inflation risk.
Hence, to study the distributional effects linked to increased capital income, it
would be interesting to see how assets and liabilities are distributed between
households. When it comes to liabilities, there are relatively good statistics
available, but with regard to the distribution of various assets, we are
unfortunately fumbling in the dark to some extent.
The collection of data on financial assets and liabilities at household level ceased
with the abolition of the wealth tax in 2007. The financial and national accounts
do provide some information on how households' various financial and real assets
have changed on aggregate. But when it comes to wealth developments for
individuals, we do not have much to go on, as the statistics in principle came to a
stop in 2007. There have been admirable attempts to estimate developments
since then via the capitalisation of incomes and expenditures, but the quality
cannot of course be compared with register data.6 Several commissions in recent
times have noted that there is a substantial need for up-to-date wealth statistics
at individual level to be able to analyse specific questions such as financial stability
risks and over-indebtedness, but also to gain a deeper insight into the income
distribution in general.7
Distributional effect of reduced
unemployment and higher employment
important
So far we have discussed the different channels by which an expansionary
monetary policy can affect income distribution via capital gains, yield and interest
rates. As you will note, however, I have avoided saying anything specific about the
size of the distributional effects. As I mentioned earlier, it is difficult to determine
exactly how large these effects are and not even their direction is always evident.
But rising stock prices and thereby larger profits when selling these assets will
tend, all else being equal, to lead to a more unequal income distribution. The
effect of the expansionary monetary policy on capital incomes, via rising equity
prices, should therefore have led to a more unequal income distribution.
However, capital income is only one part of households' total income; the largest
part is comprised of labour income.
As with capital income an expansionary monetary policy can affect the labour
income of different households in different ways. For some households the hourly
wage may be what primarily determines their income development, while for
others the number of hours worked is the most important thing - and above all
whether or not one actually has a job. As monetary policy affects these quantities
in different ways, income distribution will also be affected.
In Sweden, it is primarily the differences between the income of those who have a
job and those who do not that is important to the income distribution, rather than
the wage differences between those who work.8 This is clearly visible in the
dispersion of disposable income, that is, income including work and capital
income, as well as various transfers and after taxes are deducted. The higher the
disposable income, the less common it is that one's main source of support is
from something other than labour and capital. People who receive
unemployment benefit are mainly found in the lower part of the distribution, as
are those with sickness benefit and other benefits such as activity compensation
and financial support.9 It is also clear that the group with the lowest income
includes people who according to the Swedish Public Employment Service have a
vulnerable position on the labour market, for instance, those born outside of
Europe.
The strong economic activity in recent years has meant that demand for labour
has increased, which has meant that employment has shown a rising trend.
Unemployment has also fallen, which is impressive given that the number of
people in the labour force has at the same time increased. This development has
reasonably, all else being equal, had a levelling effect on the distribution of
income. An observation supporting this argument is that employment among
those born outside of Europe has actually also begun to increase, albeit from a
much lower level than for the other groups. Of course, it is not possible to ascribe
the whole of this distributional effect to monetary policy - in the same way as it
cannot account for the whole distributional effect of rising asset prices. But it is
quite clear that the expansionary monetary policy has contributed to the strong
development of the labour market in recent years.
Another aspect of the improvements in the labour market that is relevant here is
the link to future pensions. The focus is often on individual pension savings, but
households' total pension wealth also contains savings in collective funds, for
instance, in systems for occupational pension schemes and premium pensions.
The fact is that this form of saving currently comprises around half of total
financial assets (see Figure 3). Moreover, we all have pension assets linked to the
general income-based pension, which are not in funds but are linked to the
pension rights we earn until we retire. Whether or not one has a job does play a
major role for the size of the collective saving and the general income-based
pension. It determines whether or not one receives an occupational pension and
is also important for one's income profile during the working life. Lower
unemployment and higher employment should therefore have a levelling
distributional effect for this reason, too.
Figure 3. Collective financial assets as a proportion of total financial assets
Per cent
60 60
All sectors
Private sector
50 50
40 40
30 30
20 20
10 10
0 0
1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010
Source: Hasselberg and Ohlsson (2016)
With regard to the funded pension savings, the period with low interest rates has
been a strain. Yield has been low and this has put pressure on the pension funds
to meet the guarantees in their insurance plans. This has sometimes been raised
as a negative effect of the expansionary monetary policy, but the problem - to the
extent that it is a problem - is rather connected to the global falling trend in
longterm real interest rates.10 In light of this, economic agents need to adjust to
interest rates probably not returning to the levels we previously considered
normal. But at the same time, it is important to remember that interest rates in
the long term will nevertheless be much higher than they are now.
Price stability creates good conditions for
economic growth and high employment
If I am to summarise my presentation today, let me first say that I think it is a
good thing that distributional effects are once again being discussed with regard
to monetary policy. I believe that we can learn a lot about the impact of monetary
policy on the economy by studying how monetary policy interacts with the
distribution of income and wealth.
Today I have focused primarily on the question of what distributional effects the
expansionary monetary policy conducted by the Riksbank and other central banks
may have had. The debate has so far mainly focused on the effect of rising asset
prices. I have tried to nuance this picture and pointed out the importance of
actually looking at the total effect of monetary policy on the economy, as well as
using the correct point of comparison. My point can be summarised roughly as:
without the expansionary monetary policy, growth and employment would have
been lower and unemployment would have been higher. This would hardly have
benefitted any group in society, and especially not those with the lowest incomes.
Assessments of the distributional effects of the expansionary monetary policy
should be regarded in the light of this.
It is also important to note that no group would have benefitted from a decline in
confidence in the inflation target. The whole idea behind the inflation target was
that stable prices create good conditions for economic growth and high
employment, as it was formulated in the Riksbank's press release in 1993. This is
also a perspective that needs to be included in the discussion of distributional
effects and monetary policy.
Finally, my view is that overall resource utilisation in the Swedish economy has
now passed normal levels and can be expected to rise even higher in the coming
years. At the same time, we see ahead of us that inflation will rise towards the
target. It is therefore probable that the Riksbank sooner or later will first ease up
on the accelerator and then begin using the brake. In my opinion, it is wise to start
thinking now about how such a scenario will play out. Monetary policy will then
be unable to stimulate activity and the labour market in the same way as in recent
years and this will of course also have distributional effects. It is important that
focus is then aimed at other policy areas, where the responsibility for
distributional issues is more natural.
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