Markets, inequality and monetary policy: The rich are different

CENTRAL banks have had an enormous impact on financial markets in recent years – both directly (their purchases of assets through quantitative easing) and indirectly. Mario Draghi’s “whatever it takes” comments in 2012 helped to avert an immediate crisis in the Spanish and Italian bond markets; more generally, low interest rates have encouraged investors to shift out of cash and into risky assets, particularly equities.But this creates some dilemmas for central bankers, as Mark Carney of the Bank of England acknowledged in his Mais lecture yesterday. Central bank policy has always involved a trade-off; even under the gold standard, central banks had to balance their commitment to a sound currency with their responsibility for safeguarding the financial system. When Barings collapsed (the first time) in 1890, the Bank supported the domestic banking system but had to borrow gold from abroad to do so.The modern financial regime, which was really inaugurated by Paul Volcker, places central banks at the heart of economic policy. They have largely been successful in controlling consumer inflation. The trickier question is whether their role in safeguarding financial stability has been counter-productive; too much intervention to rescue financial markets led to an increase in risk-taking, and thus contributed to the crash of 2007-08. The analogy is with forest fires; if all fires …

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