The redistributive politics of monetary policy

Public Choice https://doi.org/10.1007/s11127-022-01009-w The redistributive politics of monetary policy Louis Rouanet1 · Peter Hazlett2 Received: 1 June 2022 / Accepted: 23 September 2022 © Springer Science+Business Media, LLC, part of Springer Nature 2022 Abstract Monetary policy and institutions are far from exempt from political influences. In this paper, we analyze monetary institutions not as being run by either benevolent technocrats or a wealth-maximizing Leviathan, but as the outcome of competition between interest groups trying to capture wealth transfers. We argue that while interest groups gaining from specific monetary policies and institutions can easily identify themselves, losers often cannot. As a result, losers have a more difficult time fighting back, and both the organization of money production and monetary policy are shaped by political competition between rentseekers. We use our framework to analyze modern developments in monetary policies and institutions, namely (1) the Fed’s reaction to the 2007 financial crisis, (2) the Fed’s reaction to the COVID crisis, and (3) the establishment and development of the euro. Keywords Inflation · Redistribution · Cantillon effects JEL Codes E42 · E58 · H00 1 Introduction Any institution or policy, to be established and maintained, must benefit at least one individual. Yet when it comes to monetary policy, existing models often act as if benevolent monetary authorities are solving for the social optimum without considering the incentives policymakers face. As Plosser (2018, p. 2) writes, however, “policy makers are not the romantic ‘Ramsey planners’ that we economists often assume in our models but actors responding to incentives and subject to institutional constraints, both of which shape policy We wish to thank Richard Wagner, Bryan Cutsinger, Ennio Piano, and Peter Boettke for their useful comments on earlier drafts of this project and Elena Prenovitz for her suggested edits. We gratefully acknowledge the financial support of the Mercatus Center and the Institute for Humane Studies. * Louis Rouanet Peter Hazlett 1 Department of Economics, Western Kentucky University, Bowling Green, KY, USA 2 Department of Economics, George Mason University, MS 3G4, Fairfax, VA 22020, USA 13 Vol.:(0123456789) Public Choice choices and outcomes.” Neither the formation of monetary institutions nor monetary policy is immune to private interests. While economists have long argued that the production of money is not neutral on the distribution of wealth and the pattern of prices (Cantillon, 1755; Hayek, 1931), it is still unclear how and through what channels monetary policy impacts those variables. Richard Cantillon was the first economist, in 1755, to argue that the first receivers of the newly created money will benefit from inflation, while the later receivers will lose from it as the real value of their cash balances depreciates—a process called the “Cantillon effect” (Blaug, 1997). Once we relax the assumption of neutral money, it is clear that certain groups may benefit from newly created money being injected into the economy while other groups may lose. At this point, what more is a central banking institution than one that changes the distribution of assets within society? Alternative monetary arrangements are rarely conceptualized as entailing different distributions of resources, and yet they surely are. The distributional consequences of Cantillon effects from monetary policy, however, are difficult to identify.1 For instance, while the development of unconventional monetary policies since 2007 has led to a ballooning literature on the impacts of monetary policy on inequality, the literature has failed to come up with decisive answers.2 Earlier studies on the effects of inflation suggest that it mainly increases inequality.3 Although some of the more recent research concurs,4 much of it has found evidence to the contrary.5 Some studies also find that contractionary monetary policy has increasing effects on inequality,6 while some indicate decreasing effects (Ballabriga & Davtyan, 2017). Finally, other studies have found a nonlinear relationship between inflation and inequality.7 The relationship between inflation and income and wealth inequality seems to be inconclusive on a one-way directional effect (O’Farrell et al., 2016). Similarly, no consensus has been reached when trying to assess the impact of unconventional monetary policy, such as quantitative easing (QE), on inequality. Studies have varied dramatically with respect to their conclusions, with some saying that unconventional monetary policy has increasing (Albert et al., 2019; Saiki & Frost, 2014; Taghizadeh-Hesary et al., 2020), decreasing (Lenza & Slačálek, 2018), heterogeneous (Guerello, 2018), ambiguous (Bernoth et al., 2015), and negligible (Casiraghi et al., 2018) effects on inequality. The growing literature on this topic seems to have failed to identify a systematic effect between monetary policy and inequality. Prasad (2014), for instance, highlights the discrepancies in the literature on the effects of monetary policy and concludes that “the sheer number of channels suggests that the net redistributive effect is specific to each economy and even to the specific type of monetary policy action undertaken by a central bank” (p. 414). While the absence of a systematic effect of monetary policy on wealth and income distribution may seem discouraging to researchers, this absence has, paradoxically, important consequences for the political economy of monetary institutions. In this paper, we argue 1 2 For attempts to identify such effects, see Cour-Thimann (2013) and Sieroń (2019). For a comprehensive review of the literature on monetary policy and inequality, see Colciago et al. (2019). 3 Bulíř and Gulde (1995); Easterly and Fischer (2001); Erosa and Ventura (2002). Dolado et al. (2018); Israel and Latsos (2020); Rouanet (2017). 5 Doepke et al. (2015); Menna and Tirelli (2017); Meh et al. (2010). 6 Areosa and MB. (2016); Coibion et al. (2017); Furceri et al. (2018); Mumtaz and Theophilopoulou (2017). 4 7 Bulíř (2001); O’Farrell and Rawdanowicz (2017). 13 Public Choice that the effect of money creation on income and wealth distribution will depend on both the prevailing economic and political equilibrium. In other words, the distributional consequences of inflation will depend on which interest groups are able to control the money creation process for their own benefit. Yet it is precisely because of the difficulty in identifying the losers from inflation that those harmed by monetary policy are unlikely to play a role in its formation. Monetary policy can be understood as a process providing concentrated benefits to special interest groups while imposing dispersed and not easily identifiable losses on other groups. Hence, while some economists—especially economists in the Austrian tradition—have emphasized how the impact of chan (...truncated)