Monetary policy Research: The European Central Bank’s strong recovery has not increased income inequality in Finland but has benefited households

European the central bank’s monetary stimulus has accelerated the price of housing and equities. It has often been concluded in public debate that this means that the wealthiest have prospered.

New on the basis of the study the reasoning does not seem to be correct. According to a study conducted by the Bank of Finland, the monetary stimulus has not had a significant effect on income and wealth differences in Finland.

According to the survey, all households in Finland benefit from the monetary stimulus. Reducing the key interest rate of the European Central Bank by 0.25 percentage points will increase Finland’s GDP by about one percent within two years, reduce unemployment and increase gross income in all income categories.

Housing The rise in prices is due to the exceptionally low level of interest rates due to the monetary stimulus and the central bank’s purchase of euro area government bonds, especially from commercial banks. As a result, households receive loans from banks on exceptionally favorable terms, which has increased demand for housing and made it more expensive.

Due to low interest rates and government bond purchases, investors have increasingly shifted capital from other investments to equities, which is one reason for stock prices to rise.

Research the starting point was international findings suggesting a accommodative monetary policy effects on income and wealth disparities in the euro area have been small.

Head of the Bank of Finland’s Monetary Policy and Research Department Juha Kilponen examined by colleagues Petri Mäki-Fräntin, Aino Silvon and Adam Gulanin whether the same finding is also true in Finland.

According to many studies, the monetary stimulus launched by the European Central Bank in early 2015 has strengthened economic growth. This, in turn, will improve employment and increase wage growth.

“The income distribution effects of monetary policy on households depend on how strongly the effects of monetary policy are reflected on their income and employment in different income categories,” the researchers write.

As companies hire more workers, low-income households in particular will benefit. Unemployment is higher than average among them. This means that a accommodative monetary policy can reduce income inequalities.

The main beneficiaries of the increase in wages are those who work. Employment is generally better among highly educated, ie upper-income, households. Therefore, a accommodative monetary policy may increase income inequality.

In the study The macroeconomic effects of the central bank’s stimulus monetary policy in Finland on economic growth, rising consumer prices, ie inflation, nominal wage developments and share and housing prices were examined.

According to the study, unemployment is declining the most among the lowest-income earners, the lowest-income fifth of households.

Researchers found that the increase in the net interest rate of households as a result of lowering the policy rate was highest in the second poorest fifth of households. The households that belong to it often have housing wealth but also a lot of housing debt. Net assets are calculated by deducting the value of liabilities from the value of the assets.

Even a small rise in house prices and asset values ​​will significantly improve the net worth of debtors’ households, as the nominal value of debt will not change.

In conclusion the researchers note that the overall impact of the accommodative monetary policy on income and wealth gaps will be small, as growth in the value of income and wealth will not be significantly different across income and wealth categories.

The stimulative monetary policy will slightly increase both income and wealth disparities in Finland. Two years after the reduction in the key interest rate, the Gini coefficient for gross income has increased by 0.05 percentage points and the Gini coefficient for net worth by 0.2 percentage points compared to the baseline situation.

“These changes are also small in relation to the historical development of the coefficients in Finland during the 21st century.”

The Gini coefficient is income distribution meter, where the extent of income dispersion is described by a single numerical value. The higher the value of the coefficient, the more unequally the income is distributed.

In addition to the Gini coefficient, the researchers examined the differences in income and wealth by comparing the income of the highest-income ten to the median income and the median wealth value of the richest ten, respectively. Even with these indicators, the stimulative monetary policy will not have a significant effect on income and wealth differences in Finland.

Stockholm professor of economics at the university Markus Jäntti specializes in the study of income and wealth differences. He finds the research conducted at the Bank of Finland interesting.

“Housing wealth is the most common type of wealth in Finland, because owner-occupied housing is quite common in us. Housing is, for example, a financial asset [rahoitusvarallisuus] compared to moderately evenly distributed. Therefore, higher house prices may not have a significant effect on inequality. ”

In contrast, financial assets, mainly securities, are highly concentrated in those with high incomes and wealth. According to Professor Jäntti, it would be important to take a closer look at how monetary policy has affected the income shares of the wealthiest.

“A significant portion of the income and wealth gap study of recent decades has looked at the upper parts of the distributions, but not in this study. In particular, changes in financial assets can be expected to have an impact specifically on the top five or one per cent group of the distribution of income and assets. This should be further explored. ”