Central banking and income inequality: The impact of monetary policy on income distribution

Abstract

Since the 2007–2008 Global Financial Crisis, income inequality and income distribution matters have gained increasing attention not only in academia but also from professionals in advanced economies. Mainstream economists also joined this concert. However, concerns of inequality as a socioeconomic matter remain very limited among mainstream central banks. This is because Mainstream Economics views inequality as an outcome of a capitalist economy. In contrast, post-Keynesian economics see it as an inherent component of capitalist economy. This chapter discusses inequality from a central banking perspective, debating inequality and causes and consequences from mainstream versus post-Keynesian perspectives. The main focus will be on the view of the interest rate as a distributive variable, highlighting what’s called the fair rate of interest, ‘Pasinetti’s rate’, as an alternative policy rate to tackle income inequality. However, a fair rate of interest by itself does not solve the inherent inequality, it should be combined with different measures, notably with fiscal policy through a long-term public investment that ensures that the unproductive rentier class disappear as Keynes wished. Thus, central banks as a public entity should essentially take responsibility to promote social justice and fairness not only for the current generation but for the next one as well.