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

as i have argued elsewhere, 2 this function of financial markets is critical to a well - functioning economy ; without it, countries, and their populations, cannot get rich. enabling financial markets to effectively perform this essential function is by no means easy ; financial markets must solve information problems to ensure that funds actually go to those with productive investments, so that they can pay back those who have lent to them. financial development involves innovations or liberalization of financial markets that improve i thank andreas lehnert for his excellent assistance and helpful comments. my remarks reflect only my own views and are not intended to reflect those of the federal open market committee or of anyone else associated with the federal reserve system. frederic s. mishkin ( 2006 ), the next great globalization : how disadvantaged nations can harness their financial systems to get rich, princeton : princeton university press. the flow of information. unfortunately, however, financial liberalization and innovation, often have flaws and do not solve information problems as well as markets may have hoped they would. when these flaws become evident, financial markets sometimes seize up, often with very negative consequences for the economy. i would argue that we have been experiencing exactly such a cycle in recent years. advances in information and communications technology have allowed for faster and more disaggregated mortgage underwriting decisions. a mortgage broker with an internet connection could quickly fill out an online form and price a loan for a customer with the help of credit - scoring technology. the same technological improvements would allow the resulting loan to be cheaply bundled with other mortgages to produce mortgage - backed securities, which could then be sold off to investors. advances in financial engineering could take the securitization process even further by aggregating slices of mortgage - backed securities into more complicated structured products, such as collateralized debt obligations ( cdos ), to tailor the credit risks of various types of assets to risk profiles desired by different kinds of investors. as has been true of many financial innovations in the past, the benefits of this disaggregated originate - to - distribute model may have been obvious, but the problems less so. the originate - to - distribute model, unfortunately, created some severe incentive problems, which are referred to as principal - agent problems, or more simply as agency problems, in which the agent ( the originator of the loans ) did not have the incentives to act fully in the interest of the principal ( the ultimate holder of the loan ). originators had every incentive to