IM_Baker_2022_0601.pub

Baker To: The Bank of Canada Governing Council Date: June 1, 2022 Re: Monetary Policy and Inequality in Canada: A New Chapter High inflation and recessions are two leading causes of inequality at short horizons, and they disproportionately harm workers at the lower end of the income distribution. [...] This trend predates the pandemic and lends credence to the thought that the effect of monetary policy on inequality does not simply net out over the business cycle. [...] In a September 2020 speech, the Governor of the Bank of Canada sought to mitigate these concerns, remarking: “We’re going to be there, creating the conditions for all boats to rise, through the full length of this recovery. [...] That’s what monetary stimulus does.” But does monetary stimulus raise all boats? The answer, as with most in economics, is “it depends.” On the one hand, COVID-related stimulus – both monetary and fiscal – has played a role in stabilizing the massive labour market peril initiated by the onset of the pandemic. [...] Communications from the central bank often emphasize a lack of supply and “extrapolative expectations” as the reasons driving imbalances in the housing market.