Monetary policy can have redistributive effect, professors say

Their paper, titled “Redistributive Monetary Policy,” was presented at an annual event hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo. The symposium drew economists, academics and leading central bankers, like chairman of the Federal Reserve and former economics department chair Ben Bernanke, to look at issues and trends in the economy. Four University professors attended the Wyoming conference, which was held over Labor Day weekend.

Economics professor Alan Blinder ’67, who also attended the event in Jackson Hole, described the study as the culmination of Brunnermeier’s and Sannikov’s larger academic work.

“The paper itself is a summary or explanation of a whole line of research that the two of them have been doing, which is an innovative way of looking at monetary policy or, more generally, what central banks do especially in times of crisis or near crisis,” Blinder said.

In “Redistributive Monetary Policy,” Brunnermeier and Sannikov discuss how financial events can cause redistribution effects. The paper consists of two sections, in which they first discuss how redistribution works before delving into three “stability concepts,” which are ways of stabilizing an economy during crisis.

Sannikov said the research team became interested in the topic as the economy began to deteriorate four years ago.

“When the [2008 financial] crisis happened, we saw it as a calling for putting our issues together to try to write models that make better sense of what’s going on in financial stability in general,” Sannikov explained.

In the first part of the paper, Sannikov and Brunnermeier argue that the funds should be redistributed to the sector that is most impaired by the crisis. According to them, in the United States, that would be the housing sector.

In the second part of the paper, they noted three “stability concepts” that can calm the economy: financial stability, price stability and fiscal debt sustainability. The two professors stressed the idea that the three concepts should not be examined separately, but rather looked at as a whole — the concepts coincide with and affect each other. Financial stability and price stability are very linked, Brunnermeier explained.

“What we want is to bring this together in one common model framework in order to show the interlinkages, and that’s a whole research agenda. It will take a long time to really fully integrate that,” Brunnermeier explained.

Brunnermeier explained two different ways out of the financial crisis if the fiscal debt of the United States is not sustainable. He claims that if the inflationary and the deflationary forces drift too far off balance, “the system is very unforgiving to mistakes.”

The research paper goes into great detail about the financial sector and the role the banks play in the current economic situation, claiming that problems seem to arise with the inability of the banks to lend more.

“This slows down the growth of the real economy as well as the tax revenue for the sovereign,” the professors write in the paper.

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The researchers said that the theoretical, counterfactual nature of their work made it difficult to conclude what would have happened had the policy been different.

At the conference, though, there was more than just the presentation of policy papers. The two professors said they enjoyed visiting Jackson Hole and were especially impressed by the area’s beautiful scenery and hiking trails.

“This is a place where we can definitely see the impact of our research in the real world. It is also an event where we can learn much more about the practice of implementing policy,” Sannikov said.

Brunnermeier is teaching two classes this fall on asset pricing. Sannikov is not instructing this semester, though he has taught about corporate finance and game theory in the past.