Young people have “benefited more than the old” from an era of low interest rates and quantitative easing (QE), a Bank of England study suggests.
The study, whose authors include the bank’s chief economist Andy Haldane, looked at the impacts of the “unprecedented loosening” in monetary policy in the aftermath of the global financial crisis on general wellbeing. Central banks lowered the cost of borrowing and created new money in Britain and elsewhere in a bid to revive ailing economies, a trend that has only accelerated in the wake of the coronavirus and the current global downturn.
The paper published on Friday says this looser monetary policy had a “positive and significant impact” on overall household wellbeing in the UK between the end of 2007 and 2014. It says surveys show overall wellbeing still declined because of the economic crisis, but monetary policy was able to “mitigate this fall.”
“Most people were made better-off in welfare terms from the monetary loosening, rich and poor, although the young have benefited more than the old,” it found.
The study suggests cheap credit kept unemployment and financial distress lower and household incomes higher than they would have been otherwise, despite the scale of job losses and squeeze on average incomes.
It argues young people with less secure jobs and higher debts, putting them more at risk if interest rates had been higher, saw the largest “welfare gains” from Bank policy.
Older households more dependent on savings income were most likely to have been made worse-off. But these households were still “relatively few in number” and suffered “typically small” losses, according to the paper.
The research acknowledges QE is often seen to have worsened inequality, by driving up the value of financial assets. It says this may explain why a majority of UK households believe lower interest rates have made them worse off. Yet the Bank says some studies suggest the impact on inequality has been “modest,” and others argue QE has even reduced inequality.
The paper also suggests increased wealth and income make a bigger difference to poorer households’ sense of wellbeing than richer ones.
“Even though wealthier households tended to gain more than poorer households in cash terms from looser monetary policy, they may not have benefitted more in utility terms,” it argues.
The authors say their paper is the first to quantify the effects of loose monetary policy by combining macroeconomic data and surveys on individual households’ balance sheets and wellbeing. It argues the research is “relevant” too for central banks’ responses worldwide to the coronavirus crisis.
But the paper suggests the Bank’s policymakers are unlikely to receive much credit any time soon from those who may have benefited from their decisions. “It seems probable that households do not attribute lower unemployment and financial distress to monetary policy.”
It adds: “Surveys of public perceptions may systematically under-estimate the welfare benefits of monetary policy easing.”