Inequality hysteresis

and the effectiveness of macroeconomic stabilisation policies

Growing economic inequality has become a matter of increasing public and policymaking concern in recent years, driven by the compounded effects of technical change and rapid globalisation not fully offset by anti-poverty and inequality mitigating policies. Resurgent food and energy inflation in 2022 and deep recessions related to the Covid-19 pandemic are aggravating this trend, and some would argue that unconventional monetary policies which have boosted asset valuations and wealth inequality have also reinforced this perception. For their part, central banks can most effectively contribute to a more equitable society by deploying the necessary tools to deliver on their mandated objectives of price and macroeconomic stability. This volume highlights a new facet of inequality: its persistence or "hysteresis" after recessions. The authors show that inequality increases faster and more persistently in the aftermath of recessions. Furthermore, greater income inequality is associated with deeper recessions, and with the reduced effectiveness of monetary policy in steering aggregate demand. Taken together, these results point to the risk of an adverse feedback loop: recessions persistently worsen inequality, and greater inequality serves to deepen recessions. These results highlight the importance of taking inequality into account when designing and implementing fiscal and monetary policy. Both policies could work in tandem to stem rising inequality and reduce the severity of recessions.