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When monetary and macroprudential goals contradict

  • Writer: Macroprudential Policy
    Macroprudential Policy
  • 15 hours ago
  • 5 min read

Titanic among icebergs.

The clash between monetary and macroprudential policies stems from an economy that substitutes debt for fair wages.

Without fiscal reforms to reduce inequality, central banks will keep struggling between financial stability and weak demand. 


Monetary Policy Goal: Price Stability


Central banks primarily use monetary policy to maintain price stability, typically targeting an inflation rate of around 2% in advanced economies (Bernanke, 2020). The tools include interest rate adjustments, quantitative easing, and forward guidance. By influencing borrowing costs and money supply, central banks aim to keep inflation stable while supporting maximum employment (Federal Reserve, 2023).


Macroprudential Policy Goal: Financial Stability


Macroprudential policy's goal is to safeguard the financial system by preventing excessive risk-taking and asset bubbles (Claessens, 2015). These include capital buffers for banks, loan-to-value (LTV) limits, and stress testing. Unlike monetary policy, which targets broad economic conditions, macroprudential regulation focuses specifically on systemic risks in credit and asset markets (Bank for International Settlements, 2023).


Income shares of the top 1% vs. the bottom 99% in major economies


In recent decades, income inequality has widened significantly across advanced economies, with the top 1% capturing a growing share of national income at the expense of the bottom 99%. This trend has been particularly stark in the U.S., where the top 1%’s income share more than doubled from 10% in 1980 to over 20% by 2020 (World Inequality Database, 2023). Meanwhile, the bottom 90% saw their share of national income decline from about 65% to just 50% over the same period. The gains were even more concentrated at the very top—the top 0.1% alone now earns nearly as much as the entire bottom 50% of Americans (Saez & Zucman, 2020).


Europe has experienced similar but less extreme trends. In the UK, the top 1%’s income share rose from 6% in 1980 to 14% by 2020, while Germany saw a more modest increase from 11% to 13% (OECD, 2023). These differences reflect stronger labor protections and progressive taxation in continental Europe. However, even in social democracies like Sweden, the top 1% has gained ground—their income share grew from 4% to 9% since 1980, though it remains below Anglo-Saxon levels (EU Commission, 2023).


Emerging economies show divergent patterns. China’s rapid growth initially reduced inequality, but since 2000, the top 1%’s share surged from 6% to 14%, fueled by urban elites benefiting from financial liberalization (IMF, 2023). In contrast, Brazil reduced its top 1% share from 28% to 22% through progressive transfers (World Bank, 2023), proving policy matters.


The Core Contradiction: Stimulus vs. Stability


The fundamental tension arises when policies designed to maintain price stability conflict with those ensuring financial stability. Rising inequality exacerbates this problem because wealth concentration distorts consumption and debt patterns (Saez & Zucman, 2020). The top 1% in the U.S. saves about 35% of income compared to less than 5% for the bottom 90% (Federal Reserve, 2023). Central banks respond to weak demand by cutting interest rates, encouraging borrowing (Mian et al., 2021). However, this leads to excessive private debt, prompting macroprudential tightening that can then suppress economic activity (Jordà et al., 2016).


Case Studies of Policy Contradictions


U.S. (2010-2023): The QE-Housing Paradox


After the 2008 crisis, the Federal Reserve kept rates near zero while regulators imposed stricter mortgage standards under Dodd-Frank (FHFA, 2022). The result was a surge in corporate and wealthy borrowing for assets like stocks, while middle-class mortgage access tightened. Inequality worsened, with the top 1% increasing their wealth share from 35% to 40% (Saez & Zucman, 2020), forcing continued reliance on monetary stimulus despite growing financial risks.


Eurozone (2014-2023): Negative Rates vs. Bank Capital Rules


The European Central Bank introduced negative interest rates to boost lending, but Basel III capital requirements made banks hesitant to take risks (ECB, 2023). Corporate debt rose to 112% of GDP, but wage growth lagged behind economic expansion (Eurostat, 2023). This left the ECB struggling to balance inflation targets with financial stability concerns.


China (2016-2023): Shadow Banking Crackdown vs. Growth Targets


The People's Bank of China tightened rules on shadow banking to control debt risks (IMF, 2023), leading to credit crunches for local governments and firms. Authorities then eased monetary policy, reigniting property bubbles. This cycle shows how macroprudential measures can inadvertently destabilize growth when underlying structural issues remain unaddressed.


Why Central Banks Can't Fix Inequality


Central banks lack tools to redistribute wealth or boost wages directly (Bernanke, 2020). Monetary policy affects aggregate demand but cannot ensure equitable growth. When wages grow slower than GDP-as in the U.S., where real wages rose just 0.3% annually versus 2.1% GDP growth since 2000 (Bureau of Labor Statistics, 2023)-households borrow to compensate. Macroprudential rules like LTV caps often restrict lower-income borrowers more than the wealthy (Mian & Sufi, 2014).


The Solution: Wage-Led Growth and Fiscal Reforms


Sustainable monetary policy requires private debt growth to stay below GDP expansion (Jordà et al., 2016). This can only happen if wages rise faster than economic output, as seen in Germany (2015-2019), where negotiated pay increases boosted consumption without debt surges (Bachmann et al., 2019). Fiscal policies must also reduce inequality through:

  1. Progressive taxation to reverse decades of tax cuts for the wealthy (Saez & Zucman, 2020)

  2. Stronger labor protections, like France's 2023 minimum wage hike (OECD, 2023)

  3. Targeted macroprudential rules that curb speculative leverage without restricting productive credit (Claessens, 2015)


Conclusion


The conflict between monetary and macroprudential policies stems from an unsustainable growth model where debt replaces wage-driven demand (Mian et al., 2021). Central banks alone cannot resolve this; fiscal reforms are essential to rebalance economies. Without wage growth and wealth redistribution, stimulus measures will keep fueling financial instability.


References


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