If monetary policy works largely through income effects is it still the best tool for stabilisation policy?

Question

Central banks have traditionally focussed on aggregate outcomes. In part this was due to data limitations – it was hard to identify distributional effects without large individual-level panels. But it also reflected the conventional view that monetary policy works largely through intertemporal substitution, which was thought to affect everyone in much the same way.

Recent research has challenged this view. HANK models suggest that monetary policy works largely through income effects. In countries where variable rate mortgages are common, cash flow channels also seem to be important (e.g. La Cava, Hughson and Kaplan 2016). Even if the aggregate effects of monetary policy are probably about as large as we always thought they were, it now appears that monetary policy works largely through redistribution.

If this is true, should we still rely on monetary policy as the main tool for macroeconomic stabilisation? And is a high degree of central bank independence still appropriate, or should central banks face greater oversight?

Answer 1

I have found the paper work on Internet. I have been living in Spain all my life and I can speak from that perspective. Here that kind of models doesn't depicts the reality of the average agent behavior. I say this because the average household consumer have almost no idea about economics or how to maximize their utility. When the monetary policy is expansive only producers and wealth owners can work in that way.

Taking into account this, I think that the effect of the monetary policy can vary between direct and non direct effects. It's theorically correct that a household consumer will borrow more if the interest rate is low and he or she will invest more in assets to have a higher revenue in the future. But in practice the average consumer follow their own behavior completely without maximizing their utility. The consumers without any idea about economics follow their leaders guidelines.

In Spain when the European Central Bank lowered the interest rates to increase the growth of the economies of the members of the EU, the leader of the country said that the people had to save money (because the banks needed thrift to earn a great profit and return their balances to the black) and everybody cut his consumption so the real effect in this case of the lower rate of interest was a massive purchase of national debt by wealth owners and banks and a flow of credit to the new firms in the growing economy. This indirectly, started to increase aggregate consumption ( not at a high level) alowing the economy to grow again.

My conclussion is that an expansive monetary policy has greater indirect effects in agreggate consumption than direct and the expectatives of economy stabilization that come after a few years lowering the interest rate and the speech of leaders and bankers is what make people borrow and consume again (besides the security of mantaining their jobs). So yes we must rely on the monetary authorities to stabilize the economy and control inflation taking into account that the wealth owners are always taking advantage of every action they do and not the average household consumer.

(I would like to know the average consumer behavior in the US after the great recession and the lowering of interest rates)

Answer 2

This is actually a great question. And I would say that no.... monetary policy is not the best tool  for stabilization, which in my mind should signify maximizing net social benefits from the economy. The best tool now is governmental policy to establish a more socially efficient minimum wage and to help labor organize better. Governmental policy would have more impact now as we see low unemployment but little real wage growth.