Frankfurt Time and again, the European Central Bank (ECB) has to justify its loose monetary policy. The central bank has not only cut interest rates in the euro area to an all-time low, but has also bought around four trillion euros in securities since 2015. Critics accuse her that her policies benefit the rich above all – and thus increase inequality in society.
The ECB countered this accusation in a new empirical study. “The easing of monetary policy seems to have dampened economic inequality overall in recent years,” their experts conclude.
The researchers examined the distributional effects of low interest rates and the ECB’s bond purchases on two important areas: regular income and wealth. The most important direct effect is therefore that on the net interest income of households, i.e. the balance of what they get for savings and what they spend on loans.
According to the calculations of the ECB economists, the current low interest rates have hardly affected the net interest income of poor households. Mainly because they only had little savings, and they often do not have high credit either.
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In contrast, middle-income recipients would have benefited. Here it became noticeable that they are relatively heavily indebted, for example to finance a property. The upper income brackets, on the other hand, suffered losses in their income because of the low interest rates.
Bond purchases boost incomes
In addition, the ECB experts assume that the bond purchases by the central bank will also have an impact on labor income. The measures support the economy and thus have a positive effect on the level of employment and wages, it is said.
Above all, people with low incomes benefited from this. Because their jobs are often particularly vulnerable to economic developments. According to the calculations in the study, the bond purchases reduced unemployment by two percentage points in the bottom 20 percent of the income distribution. In the other income groups, it fell by less than 0.5 percentage points.
According to the study, the unemployed previously earned more because of the jobs created. In addition, the wages of those already employed rose more sharply. Overall, the wages of the poorest 20 percent were three percent higher on average, and 0.5 percent higher for the other income groups.
In addition to regular income, wealth plays an important role. The most important point here: With its bond purchases, the ECB is driving up the prices of interest-bearing paper, while the yields fall conversely. This means that investors are switching to other forms of investment such as stocks or real estate – so that prices there also rise.
According to the ECB economists, it is the rich who benefit from rising share prices. However, according to their analysis, this effect is offset by a parallel rise in house prices, which on average benefits all income groups equally. Overall, property ownership accounts for around 70 to 80 percent of households’ wealth, which is why price developments there have a particularly strong impact on the distribution of wealth.
Big differences between countries
However, the ECB itself points out that there are major differences in the euro area, for example in the rate of homeowners and their incomes. In countries like Finland, Portugal and Spain, many people from the lower income groups own houses. As a result, they benefit from rising house prices. In Austria, Germany and France, on the other hand, rent plays a greater role.
The study does not examine whether rising property prices are driving rents. While this connection seems obvious at first glance, it should also be taken into account that, as with other forms of investment, the yields of real estate tend to fall due to the ECB’s policy, which should curb a possible increase in rents.
In principle, there is always one problem with studies on the effects of monetary policy: There is no parallel world with which the status quo can be compared. As a rule, the central banks loosen their monetary policy in economic crises. It is therefore difficult to distinguish between changes in distribution that are attributable to the deteriorating economic environment and effects that are directly related to monetary policy.
More: Olivier Blanchard warns: “The danger is to wake an inflation monster.”