Redistributive Monetary Policy

Liquidity and deflationary spirals self-generate endogenous risk and redistribute wealth. Monetary policy can mitigate these effects and help rebalance wealth after an adverse shock, thereby reducing endogenous risk, stabilizing the economy, and stimulating growth. The redistributive channel differs from the classical Keynesian interest rate channel in models with price stickiness. Central banks assume and redistribute tail risk when purchasing assets or relaxing their collateral requirements. Monetary policy (rules) can be seen as an insurance scheme for an economy beset by financial frictions. As with any insurance, it carries the cost of moral hazard. Redistributive monetary policy should be strictly limited to undoing the redistribution caused by the amplification effects, taking into account moral hazard considerations. 1 This paper was prepared for the 2012 Jackson Hole Symposium hosted by the Federal Reserve Bank of Kansas City, August 31 to September 1, 2012. We are grateful to Tobias Adrian, Evan Friedman, Masazumi Hattori, Nobu Kiyotaki, Jonathan Parker, Jean-Pierre Landau, Ricardo Reis, Hyun Shin, Lars Svensson, Mark Watson, and especially to Delwin Olivan for helpful suggestions, and to Amir Sufi for the discussion at the Symposium.