ECB Pushes for Deeper Analysis of Inequality in Gauging Policy

The European Central Bank says further efforts must be made to understand what the unequal distribution of income and wealth across the euro area means for the impact of its monetary policy.

As households differ substantially in terms of sensitivity to business cycles and consumption patterns, “the distribution of income and wealth plays a key role in shaping the transmission of monetary policy to economic activity and inflation,” ECB researchers said in an economic bulletin article published Wednesday.

“While recent improvements to models and data have contributed to a better understanding of this part of the monetary transmission channel, several puzzles remain,” they said, adding the ECB will continue “to invest in new macroeconomic models and data sources.”

The push for deeper analysis of how different groups are affected by monetary tools echoes recent efforts by the Federal Reserve. The U.S. central bank faced growing pressure to acknowledge the uneven impact of its policies in recent years, and committed to a more inclusive approach when it updated its policy strategy last August.

In the U.S., Black workers, who have a disproportionate share of lower-wage jobs and union membership, experienced unemployment rates double that of White workers in much of the past 50 years. That’s in part because policy makers guarding against inflation historically pulled back support just as the benefits of growth started reaching lower-income workers.

While the ECB’s report did not elaborate on racial divides in Europe, it concluded that expansionary policies in recent years had particularly pronounced effects in reducing inequality and increasing employment for lower-income households.

At the same time, other structural policies and trends such as taxation and globalization have driven widening inequality in advanced economies across the last decades. In a section on regional trends, the ECB suggested policy tightening can aggravate that.

“The ECB has neither the mandate nor the instruments that it would need to specifically target the distribution of income and wealth,” the report said. However, “current policies generally seem to have an equalizing impact through their contribution to macroeconomic stabilization.”

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