What Is This "Monetary Policy" That You Refer To?

Now you might argue that asset prices didn’t do poorly during the 1970s because of easy money, they did poorly because of high inflation.

Ahem . . .

When economists have debates about the appropriate monetary policy, they usually agree that policy should in some sense be predictable and stable. Disagreement may occur over issues such as the optimal rate of inflation. One economist may advocate 2% trend inflation, another may advocate 4%, and a third may advocate 0% inflation. Or they might prefer a different target, such as NGDP growth.

A study of the effect of monetary shocks on asset prices tells us nothing about the effect of changes in the steady-state rate of inflation. Thus unexpected monetary stimulus often creates a temporary boom, boosting asset prices, while a permanent increase in inflation raises the effective tax rate on real capital income, thus depressing real capital prices. This is what happened during the 1970s.

This means that a temporary switch to easier money will boost the racial wealth gap by raising asset prices, and a permanent switch to much easier money (say 10% inflation) will reduce the wealth gap—but only by making the rich poorer at a faster rate than it makes the poor even poorer.

While I question the authors’ interpretation of their results, I completely agree with the final sentence of their conclusion:

Clearly, this does not mean that achieving racial equity should not be a first-order objective for economic policy. We strongly think it should. But the tools available to central banks might not be the right ones, and could possibly be counter-productive.

PS.  Here’s some data on the racial wealth gap:

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