ECB’s Policy Measures Stimulate the Economy - Long-term Effects on Wealth Inequality Unclear

European Central Bank (ECB) supports prices, economic activity, and inflation expectations through unconventional measures both in the euro area as a whole and in Germany - but the measures are likely to raise wealth inequality in the short term

The ECB’s ultra-loose monetary policy aimed at easing the financial and debt crisis is making an impact. Prices and GDP have been shored up and inflation expectations stabilized. However, these unconventional measures—particularly the program to purchase government and corporate bonds which began in early 2015—will temporarily increase wealth inequality in the euro area. It is still uncertain whether this distributionary effect will persist in the long term or whether it will be balanced out. These are the findings of two studies published by the German Institute for Economic Research (DIW Berlin) in issue 7(2016) of DIW Economic Bulletin.

Monetary policy measures are considered to be unconventional if they are not directly exerted through a change in base interest rate. These include credit expansion to banks, the OMT program (Outright Monetary Transactions) and the large-scale bond purchase program. The central bank has been implementing the latter since March 2015 to combat deflationary pressures and will continue to purchase corporate and government bonds worth 60 billion euros per month from euro area countries until at least March 2017.
 
Effective monetary policy for the euro area and Germany

In order to assess the impact of monetary policy on prices and economic development, DIW Berlin researchers Malte Rieth, Michael Hachula, and Michele Piffer have not only considered individual programs but have calculated the average effect of the ECB’s individual measures. With the aid of simulations, the economic researchers concluded that both the euro area as a whole and Germany have benefited from the unconventional measures. “Our findings from the empirical analysis indicate that the various measures have helped the ECB to fulfill its mandate,” said the researchers. Fears that the monetary policy interventions would be good for the whole of Europe but might harm Germany have not been confirmed. “On the contrary, we have observed that prices and overall economic output have reacted similarly in Germany and in the euro area as a whole.”

Signs of an increase in inequality—at least in the short term

DIW Berlin’s researchers Benjamin Beckers, Kerstin Bernoth, and Philipp König have examined whether the ECB’s bond purchase program has increased or decreased wealth inequality in the euro area. An analysis of the interest rate risk channel alone shows how difficult this assessment is. On the one hand, households that plan to take out new loans benefit initially from an interest rate cut. On the other hand, interest rates on savings have also fallen, unless households have restructured their portfolios to alternative investment products such as real estate and stocks, where demand and prices have risen. Similarly the market value of long-term fixed-rate bonds has been growing simultaneously. “Without further research, it is impossible to say precisely who the winners and losers of this development are. Since stocks, bonds, and real estate are mainly held by the wealthy rather than by poorer individuals, it is likely that wealth inequality has initially risen,” said the authors.

However, the long-term effects of the bond purchases are currently far from clear. “On the one hand, excessive increases in asset prices are likely to revert over time. On the other hand, capital gains and losses may well occur in different households and therefore lead to longer-term distributional effects.” However, less wealthy households could also benefit if the program is successful in helping to stabilize and revitalize the economy and, in turn, the labor market and inflation. Due to the exceptional scale of the program, the researchers have called for the distributional effects to be examined more closely and for the adverse distributional effects to be also taken into account when phasing out from ultra-loose monetary policy.