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1. Federal Reserve Anti-Inflation Policy: Wealth Protection for the 1%?

Author:
Aaron Medlin and Gerald Epstein
Publication Date:
02-2023
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
The Federal Reserve has a dual mandate from Congress that directs it to conduct monetary policy as such to achieve “maximum employment” and “stable prices.” Yet the U.S. central bank typically chooses to address inflation as a top priority and focuses on employment only secondarily, if at all. Why? In this paper we argue that an important reason is that the Federal Reserve conducts policy so as protect the real wealth of the top 1% of the wealth distribution. We focus on the Fed’s fight against inflation in 2021-2022, when it rapidly raised its policy interest rates by almost 4 percentage points in the face of more than 6 percent inflation. Using a novel econometric analysis, we provide evidence that shows that this policy serves as a real net wealth protection policy for the 1% by restoring some of the lost wealth that they would otherwise lose due to unexpected inflation. The results of this policy for the top 10% of the wealth distribution are econometrically ambiguous. But to the extent that the Fed’s high interest rates generate higher unemployment or even a recession, this wealth protection for the 1% could have serious income costs for workers who find themselves or another member of their household out of a job.
Topic:
Political Economy, Monetary Policy, Inflation, Elites, and Wealth
Political Geography:
North America and United States of America

2. Federal Reserve Monetary Policy and Wealth Inequality

Author:
Aaron Medlin and Gerald Epstein
Publication Date:
04-2023
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
This study analyzes the impact of conventional expansionary monetary policy on wealth inequality in the United States from 1976 to 2012. We use the local projections instrumental variable (LP-IV) approach for our estimation method and employ two monetary shock series to identify the causal effect. High-frequency data is obtained on the distribution of real net wealth and the Gini index from two new sources: Realtime Inequality and the Federal Reserve’s Distributional Financial Accounts (DFA). We find that expansionary monetary policy has positive and persistent effects on wealth inequality over the medium term, in contrast to previous research. Specifically, an expansionary policy of 100 basis points cut in the policy rate increases the share of wealth for the top 10 and 1 percent and reduces the share for the bottom 50 and middle 40 percent of the distribution. Overall, wealth inequality, as measured by the Gini coefficient, increases around 0.005 on the Gini scale (between 0 and 1) with Realtime data and around 0.015 using DFA data. We also find that the effect size of expansionary policy on inequality varies over prior decades; the effects between 1976 and 1980 are smaller and transient relative to the periods since. We also find that expansionary policy increases wealth inequality regardless of the business cycle. However, its effects are more substantial during economic expansions. Lastly, we estimate the historical contribution of monetary policy to the variation in wealth distribution and find that it does account for significant variations in wealth distribution during certain periods of recent U.S. history.
Topic:
Monetary Policy, Federal Reserve, Economic Inequality, and Wealth Distribution
Political Geography:
Global Focus

3. The Price of Speculation: Cryptocurrencies and Climate Change

Author:
Izaura Solipa and Gerald Epstein
Publication Date:
08-2022
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
Cryptocurrencies are a form of digital currency whose popularity has rapidly increased over the past decade. What distinguishes them from other electronic currencies is their underlying technology known as the blockchain, a decentralized public ledger in which transactions among the network peers are accurately and securely recorded. The validation and mining process, where new coins are issued, is highly computationally intensive and thus requires vast amounts of energy. The literature estimates energy consumption levels of the cryptocurrency mining to be as high as those of countries such as Angola, Iceland or Cuba, and a corresponding emission of at least 3-15 million tons of CO2. We discuss these estimated impacts of Bitcoin and other cryptocurrencies on both energy levels and the environment, and then outline alternative applications that could promote climate change mitigation. We argue that despite the latter applications and the possible benefits from the technology, particularly in the energy sector, the financial uses of blockchain are creating significant environmental costs without any clear social or economic benefit stemming from this largely speculative activity.
Topic:
Climate Change, Science and Technology, Economy, Cryptocurrencies, Blockchain, Digital Currency, and Speculation
Political Geography:
Global Focus

4. The Public Banking Movement in the United States: Networks, Agenda, Initiatives, and Challenges

Author:
Esra Ugurlu and Gerald Epstein
Publication Date:
03-2021
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
In this paper, we analyze the contemporary public banking initiatives in the United States. We first provide a brief historical account of public-oriented banking in the United States. We then map out the central nodes in the contemporary public banking advocacy networks. Based on an online questionnaire and semi-structured interviews we held with public banking organizers and experts across the country, we provide an overview of the achievements of this growing movement, describe the central socio-economic issues they organize around, and examine the challenges they face. We demonstrate that the interest in public banking is a reaction to a number of socio-economic and ecological issues the United States faces, including the infrastructure crisis, ecological crisis, financial exclusion, and problems stemming from the management of state and local government resources. We argue that public banking can be an important tool in addressing these problems and suggest how the federal government, through the Treasury and the Federal Reserve, can support these initiatives.
Topic:
Political Economy, Banks, Advocacy, and Public Banking
Political Geography:
North America and United States of America

5. Did Quantitative Easing Increase Income Inequality?

Author:
Juan Montecino and Gerald Epstein
Publication Date:
10-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The impact of the post-meltdown Federal Reserve policy of ultra-low interest rates and Quantitative Easing (QE) on income and wealth inequality has become an important policy and political issue. Critics have argued that by raising asset prices, near-zero interest rates and QE have significantly contributed to increases in inequality, while practitioners of central banking, counter that the distributional impact have probably been either neutral or even egalitarian in nature due to its employment impacts. Yet there has been little academic research that addresses empirically this important question. We use data from the Federal Reserve’s Tri-Annual Survey of Consumer Finances (SCF) and look at the evolution of income by quintile between the “Pre- QE period” and the “QE period” analyzing three key impact channels of QE policy on income distribution: 1) the employment channel 2) the asset appreciation and return channel, and 3) the mortgage refinancing channel. Using recentered influence function (RIF) regressions pioneered by Firpo et. al (2007) in conjunction with the well-known Oaxaca-Blinder decomposition technique, we find that while employment changes and mortgage refinancing were equalizing, these impacts were nonetheless swamped by the large dis-equalizing effects of equity price appreciations. Reductions in returns to short term assets added further to dis-equalizing processes between the periods. Bond price appreciations, surprisingly, had little distributional impact. We cannot know precisely how much of these changes are due to QE as opposed to other influences, but to assess potential causal effects we utilize a counter-factual exercise to assess the quantitative range of impacts of QE on the main channels. We conclude that, most likely, QE was modestly dis-equalizing, despite having some positive impacts on employment and mortgage refinancing. The modestly dis-equalizing impacts were due to both policy choices and deep seated structural problems, such as the long-term deterioration in labor market opportunities for many workers due to globalization and legal and political reductions in labor bargaining power that have contributed to long term wage stagnation. Finally, there is no support in our analysis, for the proposition that raising interest rates would be an efficient mechanism for improving income distribution, because of the likely costs in terms of employment and debt refinancing opportunities.
Topic:
Federal Reserve, Inequality, Income Inequality, Fiscal Policy, and Wage Growth
Political Geography:
North America and United States of America

6. Central Banks as Agents of Economic Development

Author:
Gerald Epstein
Publication Date:
05-2006
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
In the last two decades, there has been a global sea change in the theory and practice of central banking. The currently dominant 'best practice' approach to central banking consists of the following: (1) central bank independence (2) a focus on inflation fighting (including adopting formal 'inflation targeting') and (3) the use of indirect methods of monetary policy (that is, short-term interest rates as opposed to direct methods such as credit ceilings). This paper argues that this neo-liberal approach to central banking is highly idiosyncratic in that, as a package, it is dramatically different from the historically dominant theory and practice of central banking, not only in the developing world, but, notably, in the now developed countries themselves. Throughout the early and recent history of central banking in the US, England, Europe, and elsewhere, financing governments, managing exchange rates, and supporting economic sectors by using 'direct methods' of intervention have been among the most important tasks of central banking and, indeed, in many cases, were among the reasons for their existence. The neo-liberal central bank policy package, then, is drastically out of step with the history and dominant practice of central banking throughout most of its history.
Topic:
Development and Economics
Political Geography:
United States, Europe, and England