Should Monetary Policy Take Inequality and Climate Change Into Account? Critically Examine This Statement Using Relevant Literature and Country Examples. A Case Study of England
CHAPTER ONE
PREAMBLE TO THE PROPOSAL
The importance of central banks in society, as well as their independence from political demands, are once again in the spotlight. This time, it’s not only about politicians wanting lower interest rates and a helping hand in financing their budgets, though that has played a role. The newest debates center on major ethical issues, such as the impact of monetary policy activities on income and wealth distribution, as well as initiatives to prevent climate change. To some jaded onlookers, this is just the latest in a long line of attempts to gain access to the press for special interests. However, as has lately been demonstrated, governmental neglect of big distributional and intergenerational issues can have far-reaching effects for society as a whole. Climate change and inequality are first-order issues in that framework, albeit monetary policy is inevitably second-order (Adam, 2016)
Should central banks oppose requests to incorporate more ethical distributional and environmental concerns into the formulation and implementation of the broader set of monetary policy tools they’ve employed over the last decade? Many central bankers will scoff at the idea, fearful of losing their independence and becoming distracted from their primary abilities. These are legitimate and significant concerns. But, to the degree that huge systemic challenges like climate change and inequality may be meaningfully altered without detracting from the fundamental goals of monetary policy, central banks’ supplementary mandates, whether explicit or implicit, arguably demand consideration (Ampudia, 2018)
A closer examination reveals that the room for improvement is smaller than some have stated. Central banks, on the other hand, have lagged behind society’s reaction to these concerns and may make a valuable contribution in a variety of ways. While they may be concerned about losing their independence, central banks that ignore realistic public expectations in these areas may face a larger threat. (Andrade,2016)
CONCLUSION
Income and wealth inequality, as well as climate change, should be given more attention by central banks than has hitherto been the case. Nonetheless, current central bank policies appear to have had far less of a net negative influence in these areas than some opponents claim. Government fiscal and regulatory policies are far more effective tools for achieving objectives in these and other areas where monetary policy might have unintended consequences. In terms of climate change, central banks would cut their purchases of bonds issued by carbon-intensive corporations if they applied the new approach to climate-related financial risk that they are imposing on private bankers to their own bond purchases. In addition, their ongoing study into the influence of financial sector operations on climate-related economic hazards could better inform government tax and regulatory measures aimed at mitigating such risks.
Almost all central bankers believe direct helicopter money cash transfers to the general population (in lieu of QE asset purchases) to be a step too far. However, when faced with recessionary conditions that necessitate the use of expansive monetary tools and fiscal expansion to help restore macroeconomic balance, central banks should be prepared to go further. They should be especially willing to use the powers granted to them by their mission to ensure that progressive, inequality-reducing fiscal expansion on a scale acceptable for macroeconomic conditions is not stifled by a negative financial market reaction. This would necessitate extreme caution in attaining fiscal-monetary coordination without succumbing to fiscal dominance. Even if the central bank does not directly fund such programs, the effect could be equivalent to helicopter money through the budget.
The government’s failure to consider the influence of macroeconomic and structural change on income and wealth distribution is partially due to the issue’s complexity and the fact that it has not gotten the attention it deserves in terms of study. In order to achieve their major goals, central banks collect and evaluate micro-level data. They could also do more to investigate the extent and effects of other potential government regulations that could prevent unwanted changes in income and wealth distribution as a result of this initiative. Such operations are not only consistent with the secondary objectives set forth in most central bank mandates. They can also be used by central banks in their entirety. Indeed, such efforts should help underpin society’s support for the independence that is necessary for them to deliver on their key macroeconomic aims by underlining to the general public their commitment to the general good.
References
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