Financial Stability and Inequality: A Challenge for Macroprudential Regulation

From a new post by Pierre Monnin:

“Theoretical analyses and recent empirical evidence support the hypothesis that increasing inequality can pave the way to financial instability. Considering these results, central banks and financial regulators should keep a close watch on income and wealth distributions in their countries. They should be particularly attentive to a simultaneous rise in inequality and aggregate debt. They might also consider including inequality in their sets of early warning indicators for financial crises.”

“Central banks and financial regulators should also carefully consider the potential feedback loops between their macroprudential policy, inequality and financial stability. Some measures aimed at strengthening financial stability might increase inequality, and thus impede their initial goals. In such a case, central banks and financial regulators, perhaps in collaboration with fiscal authorities, could consider accompanying measures to mitigate the impact of macroprudential measures on inequality. When facing the choice between two policies with the same impact on financial stability, they should prefer the option that does not lead to higher inequality (or increases it the least) to avoid or reduce the side effects of higher inequality on financial stability. Finally, in accordance with their mandate regarding financial stability, central banks and financial regulators may have some reasons to support policies, e.g. fiscal policies, that mitigate the impact of inequality on financial stability.”


Posted by at 1:32 PM

Labels: Inclusive Growth


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