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

Introduction

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)

The Criticism

These additional features have resulted in a greater political focus on central banks’ mandates and tools. The strong and prolonged increase in the market price of long-term bonds, in particular, has prompted criticism from egalitarians worried that low-income households do not own significant amounts of these bonds. Environmentalists have also raised concerns about central bank acquisitions of bonds issued by companies with substantial carbon footprints. A distributional issue is at stake in each of these two important dimensions: a potential bias against lower-income households or future generations. These worries are undoubtedly shared by many people outside of activist circles.

What is the source of the opposition?

Even those central bankers who may personally value the difficulties of societal injustice and climate change have appeared to be stifled by three main “brakes.” First and foremost, they are concerned about becoming overly entangled with politicians whose competing interests may succeed in shifting monetary policy’s focus away from its fundamental objectives. Second, they believe the impact of monetary policy on distribution and the environment will be far smaller than some of their harshest detractors have claimed.

Third, they are concerned that using a combination of policy tools to achieve goals not clearly mentioned in their mandates could become legally and ethically problematic in a democracy. While legal limits vary by jurisdiction, ethical concerns do not: it may be unethical for public officials to utilize powers granted to them for reasons not sanctioned or anticipated by the democratically elected legislature, potentially encroaching on its domain. Furthermore, such action could jeopardize the public’s support for the central bank’s ability to function successfully. A new generation of central bankers is replacing those who oversaw the recovery from the financial crisis. How much more should they pay attention to these calls?

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