ECB research says stimulus didn’t favour the rich

August 1, 2018 Updated: August 1, 2018

FRANKFURT—New research published by the European Central Bank (ECB) pushes back against criticism levelled at its 2.4 trillion euro stimulus program, indicating it did not increase inequality and helped boost poorer households’ income by putting people back to work.

The arguments in the paper released on July 18 help counter accusations, particularly from German politicians and news media, that the stimulus program hurt savers by depressing returns and benefited financially wobbly southern European governments such as Italy’s through lower borrowing costs.

A headline in the Bild newspaper in December 2015, a few months after the program started, read: “We’ll Never Get Savings Interest Again.”

The ECB research—compiled by five economists from the central bank and one outside author—found that pain in one area could be compensated by stimulus gains in other areas, and that employment and wage gains benefited people across all income categories—in Germany as well as in Italy.

“Monetary policy in recent years benefited most households and did not contribute to an increase in wealth, income, or consumption inequality,” they wrote.

The report does not represent an official stance by the Frankfurt-based bank, which conducts monetary policy for the 19 countries that use the euro currency. The bank makes those policies clear in statements after its regular meetings and in news conferences held by Draghi.

The researchers sought to measure the total effect of the stimulus program across different aspects of people’s pocketbooks: house prices, mortgage payments, rise or fall in investment holdings, wages, and interest on savings.

The research found that direct and obvious losses—such as a bank statement showing zero returns on savings due to low interest rate policy—were often offset by indirect benefits. That could be from people returning to work, as the stimulus policy lifts demand across the economy.

The ECB cut its benchmark interest rate from 1.5 percent to zero from 2011 to 2016 and started its stimulus program in March 2015. Unemployment in the 19-country eurozone has fallen from 12.1 percent in 2013 to 8.4 percent currently, with 8.4 million more people in work.

The researchers also found that people in the lowest fifth by wealth—with a median net worth of only 1,100 euros—saw a gain of 2.5 percent after a year of stimulus, while the top fifth saw more modest increases of about 1 percent. A measure of inequality commonly used by economists, called the Gini coefficient, decreased slightly.

The ECB is already getting ready to phase out at year-end its stimulus program. The stimulus is created by buying bonds from banks, which pushes newly created money into the financial system. The aim is to make borrowing cheaper in the wider economy, stimulating economic activity.

Even with the stimulus, the bank struggled for a long time to push inflation up to its goal of just under 2 percent. Now, however, ECB President Mario Draghi and the members of the bank’s governing council say they are more confident inflation is finally trending that way.

The U.S. Federal Reserve, the Bank of Japan, and the Bank of England have all run similar bond purchase programs. The Fed ended its program after accumulating some $4.5 trillion in bonds and is withdrawing stimulus by raising interest rates, and letting its bond holdings shrink as the bonds are repaid.

A March report published by the Bank of England found that the impact of such stimulus on wealth and income inequality was small; a study by academic economists in the United States in 2014 found that expansionary monetary policy by the Fed reduced inequality.

From The Associated Press