Michael Wickens's picture
Affiliation: 
Cardiff Business School & University of York
Credentials: 
Professor of economics

Voting history

Monetary Policy and Inequality

Question 2: What role should inequality play in the monetary policy decisions (interest rate policy and quantitative easing)?

Answer:
Substantive role
Confidence level:
Very confident
Comment:
Considerations of inequality should not influence current inflation targeting policy via interest rates. This is not the case for QE which currently avoids distorting after tax income at the expense of greatly distorting wealth.

Question 1: How large is the impact of monetary policy on the joint distribution of income and wealth?

Answer:
Large
Confidence level:
Very confident
Comment:
In principle inflation clearly has a large impact on income depending on how much income is indexed. This includes wage income, pensions and profits. QE has clearly distorted asset prices and hence wealth. This is not, however, a reason to change the Bank’s inflatio remit. QE as currently used is really fiscal policy to avoid raising taxes which would be distortionary to income as well as wealth. This aspect of monetary policy is not a desirable long-run feature. Ironically, the price for using QE to maintain after tax income stability has been increased wealth inequality.

Fiscal Rules in the European Monetary Union

Question 2: Which of the following is the one reform you would choose to improve fiscal rules?

Answer:
Re-nationalization of fiscal discipline
Confidence level:
Very confident
Comment:
Each country should implement the sort of debt sustainability rule set out in my answer to question 1. A fiscal council should then assess whether they are plausible. This would have the added advantage of avoiding fiscal federalism.

Proposition 1: The existing fiscal rules for European Monetary Union members require revision.

Answer:
Strongly agree
Confidence level:
Very confident
Comment:
The EU's fiscal rules are based on the Stability and Growth Pact. They are arbitrary, inflexible, inappropriate and based on an incorrect formulation of the problem. The correct criterion is that sovereign debt should be sustainable: i.e. governments should be able to service and redeem their debt. This permits much more flexibility than the EU's rules and covers all situations for countries whether in a monetary union, having a fixed or a floating exchange rate. The sustainability of the EU's rules is based on a deficit of 3% of GDP, a debt GDP ratio of 60% and inflation of 5%. None of these is either necessary or sufficient to achieve debt sustainability. Their only possible justification is that they are simple. To implement a debt sustainability rule governments should publish detailed plans which can be assessed for their plausibility.

Asset Prices and Monetary Policy

Proposition 2: Asset prices and financial imbalances are best addressed using macroprudential tools and left out of the monetary policy decision making process.

 

Answer:
Agree
Confidence level:
Confident
Comment:
See first answer. Best addressed? Yes. But this doesn't necessarily imply it is possible to do so effectively. For example, if a rise in house prices is due to supply shortages, monetary policy, which acts on mainly on demand, at best suppresses the problem and at worst would be ineffective. The Bank might have more success in influencing financial asset prices. A start would be to stop inducing portfolio substitution by keeping interest rates so low and by buying government bonds from the private sector.

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