The Monetary Policy Institute at the Bank of Italy Conference on Monetary Policy and Income Distribution
Sylvio Kappes
Federal University of Ceará, Brazil
Louis-Philippe Rochon
Full Professor of Economics, Laurentian University, Canada
Lilian Rolim
University of Campinas, Brazil
Guillermo Matamoros-Romero
University of Ottawa, Canada
“The opportunity of attending presentations by mainstream scholars, which is not always the case for many of us, was also valuable. We could understand better how central banks think and the new research avenues in mainstream economics. This can be helpful for us to better highlight our differences and, more importantly, our unique contributions.”
The Monetary Policy Institute was well represented at the Bank of Italy conference, March 30–31, in beautiful Naples, Italy. The conference was primarily on monetary policy and income distribution, which has been a dominant area of research in post-Keynesian economics, since the mid-1980s (see here for a discussion), as opposed to mainstream interest that emerged only following quantitative easing and the great financial crisis (GFC) (see here for a review). This conference is the result of an idea Kappes and Rochon had about two years ago and approached the International Association of Research in Income and Wealth. The idea was received very enthusiastically, and the Bank of Italy was brought on board as the local organizers of the event.
From the start, it was clear that there was going to be a large heterodox presence. This was certainly the case. Indeed, initially, half the papers were from heterodox authors, although by the time of the event, 5 heterodox authors withdrew for various reasons, which was quite unfortunate. Nevertheless, we were still an important component at the conference. In addition, there were many heterodox participants, owing to the YSI even that took place the day before, co-organized by Maria Cristina Barbieri Goés, Giacomo Rella, Stefano Di Bucchianico and Sylvio Kappes. The papers’ presenters were Francisco Amsler, Hannah Engljähringer, Pascal Meichtry, Simone Arrigoni, Lilian Rolim and Aina Puig. There was also a poster session with the participations of Débora Nunes, Ettore Gallo, Maximilian Longmuir, Francesci Ruggeri, and Giacomo Sbrenna.
All in all, it was certainly the first time this many heterodox economists attended such a high-profile orthodox event in decades — or indeed perhaps ever. In our minds, our objective was to create an event where there would be both heterodox and orthodox economists sitting side by side and listening to each other, and engaging with us. In private, however, we joked about how no one would show up at our presentations. The reality, if we are being honest, was somewhere in between. We interacted not only with economists from the Bank of Italy, but also from the BIS and the ECB, and economists from other universities around the world. And the exchange was rather positive.
The first day of the conference was when all heterodox papers were presented. Melanie Long presented a paper on the effects of monetary policy on race and gender. Lilian Rolim, in co-authorship with Laura Carvalho and Dany Lang, explored monetary policy rules in an agent-based model, building what they called the inequality-augmented Phillips curve. Alessandro Franconi, in a paper with Giacomo Rella, analyzed the impacts of monetary policy across the wealth distribution. Guillermo Matamoros Romero and Mario Seccareccia explored the dominance of the Taylor rule — at least until the GFC — and its implications on the rentier income share in industrialized countries. Stefano Di Bucchianico, with Antonino Lofaro, analyzed the impact of monetary policy on functional income distribution for 15 advanced economies. And, closing the day, Kappes and Rochon presented a paper (co-authored with Pedro Clavijo) on the Pasinetti Index.
The last three papers, all dealing with functional income distribution, composed the last section of the first day. This certainly annoyed one economist from the Bank of Italy (BoI), who asked why we should bother studying the functional distribution of income, as opposed to sticking with the personal distribution of income. He argued that dividing society in social classes was a flaw in the work of Pasinetti and Sraffa, because individuals generally belong to more than one class. We could confirm that heterodox economics is (unfortunately) still quite unknown to many mainstream economists, since in every single heterodox presentation some of them had facial expressions that seem to ask: “what the hell are you saying”?
In our view, we guess, central banks are OK with the idea that monetary policy has negative effects on individuals, but it is quite another argument to claim that it hurts women as a group, or black people as a group, or workers as a group, or that it benefits rentiers as a group. Social classes are still something central banks are reluctant to discuss, since it makes them vulnerable to concepts of power. This said, we did see a few concepts that we are quite used to, such as labour shares or racial issues, appearing in specific presentations by scholars from a mainstream perspective. It is true that these were very few cases, but we hope that this is a sign of positive changes that would enlarge the possibilities of dialogue between mainstream and heterodox scholars. Indeed, such a possibility was explicitly acknowledged by an economist from the Chicago Federal Reserve who related his work to Melanie Long’s presentation.
But overall, we think, central bankers think discussing monetary policy in terms of ‘individuals’ makes their job value-free and unbiased: recognizing social classes is either useless, unrealistic or simply ‘ideological’ and biased. The irony, of course, is that they are perfectly comfortable when the mainstream New Keynesian models divide society in ‘hand-to-mouth’ individuals (those who spend all what they earn!) and everyone else; or in low-type and high-type individuals (in terms of skills, ability, risk aversion, and so on).
As we discussed the Pasinetti Index, there was a naive question whether it was appropriate to consider the 10-year bond rate when discussing annual rates of inflation (as if bond holders were not receiving a return on that bond every year or less!). Although the debate on the appropriate rate of interest to use in the Pasinetti Index is still open, Seccareccia and Lavoie (2016) argue that a long-term interest rate (such as that on 10-year or more bonds) makes complete sense in the context of Keynes’s rentier definition of a person who makes a living mainly out of interest bearing assets.
The Kappes and Rochon paper (written with Pedro Clavijo) was rather well received, we think. Two BIS economists gave positive remarks on the paper, one of them even saying that he sees no substantial difference between his own work and ours. A BoI economist, however, was more skeptical, maintaining that there are no “pure” workers, capitalists or rentiers in the world, since most people receive income from more than one source, therefore arguing against the use of functional income distribution (as hinted above). Here again, arguing against using functional income distribution for being unrealistic is not serious, if compared with the also-simplifying assumptions made in New Keynesian models. As post-Keynesians, we like functional distribution because we believe that belonging to a social group is a significant constraint on the behaviour and income of a person due to power relations and institutions embedded in society. In contrast, New Keynesians, even in models with heterogeneous agents, prefer personal distribution because they believe that it is the income level alone that shapes individual behaviour (due to uninsured individuals against income shocks and its differential impact on marginal propensities to consume). According to them, if institutions matter it is because they affect all individuals equally, regardless to the social group to which they belong. In contrast, we think that both personal and functional distribution are critical to understanding a real-world complex economy: both are the two sides of a coin and neither side should be neglected.
The keynote speech, by Gianluca Violante, from Princeton University, was quite stimulating. Using a Hank Model (Heterogeneous Agents New-Keynesian), he built what he called the “inflation-inclusion trade-off”. The basic idea is that unemployment has hysteresis effects, in the sense that the longer a worker is unemployed, the more she/he loses skills. Therefore, an inflation-fighting policy have long-lasting impacts due to this hysteresis. Moreover, since the workers most sensible to the business cycles are those at the bottom of the income distribution ladder, inflation-fighting has also negative distributional consequences. In a sense, this is similar to a heterodox position using all the mainstream paraphernalia. It is quite interesting to note the similarities between Violante’s work and that of one of us (Rolim) (written with Laura Carvalho and Dany Lang), in which she builds an inequality-augmented Phillips Curve.
The key insight underlying both the “inflation-inclusion trade-off” by Violante and the “inequality-augmented Phillips Curve” by Rolim et al. is the key role of unemployment plays in both inflation and inequality. Although the theoretical basis of these two presentations differed, both arrived at a trade-off between low inflation and low inequality, thus expanding the trade-offs faced by central banks. The discussion after Rolim’s presentation focused on the actual relevance of the Phillips Curve today. While the “inequality-augmented Phillips Curve” is compatible with a flat(ter) Phillips curve if one accounts for the decrease in workers’ bargaining power, many of us agreed that the current worldwide inflationary process cannot be explained by the Phillips Curve. This conclusion certainly takes us to other heterodox contributions discussing the nature of the current inflationary process (for instance, see here and here).
As a side note, the discussant for the keynote speech, a BoI economist, commented that Violante’s Hank model was ‘completely useless’ for Italy, because the BoI did not have a dual mandate: Violante had suggested that the Fed’s dual mandate might have played a role in keeping interest rates very low in the period following the GFC (until the Covid inflationary surge in 2021). Nevertheless, the author and his discussant did not mention that all central banks in industrialized countries (including the ECB), regardless of their mandate, kept interest rates very low as well because the fear at the time was not inflation but possible deflation and secular stagnation.
Finally, the closing remarks were given by the Governor of the BoI, Ignazio Visco, who described himself more on the dovish side, claimed that, although Hank models are appealing because they escape from the representative agent assumption — and that they were certainly an improvement over the IS-LM model — he would still not adopt a Hank model for the conduct of monetary policy. Interestingly, the Governor underscored the complementarities between fiscal and monetary policies to control inflation, where “these complementarities not only concern the response to the deflationary pressures that we observed before and during the pandemic, but also affect, as we speak, the fight against inflation.” (p. 4) Paradoxically, a couple of pages later, these complementarities only mattered to him when fighting inflation and not when addressing inequalities:
“Let me conclude. Inequalities must be taken into account by central banks, as they are intrinsically related to inflation and because they affect, and are affected by, monetary policy. Nevertheless, addressing inequalities remains primarily a responsibility of governments. Only governments possess, in fact, the democratic legitimacy to assess how much redistribution is needed. Only governments can apply the most suitable tools, including taxation, transfers, access to education and the provision of other public services, not to mention market regulation. I therefore believe that including inequality in the mandate of monetary policy would be unwarranted” (p. 6).
Overall, we think this conference was a huge success from the heterodox point of view. We got our message out. We received far more good comments than unfriendly remarks. Our initial expectation — that no one from the top institutions would show up at the heterodox presentations — was completely wrong. Not a single person quitted the room during our papers, and we always received constructive comments from mainstream economists on the discussion. The opportunity of attending presentations by mainstream scholars, which is not always the case for many of us, was also valuable. We could understand better how central banks think and the new research avenues in mainstream economics. This can be helpful for us to better highlight our differences and, more importantly, our unique contributions.
One possible negative point is that, during coffee breaks and social events, the heterodox folks banded together although we did interact (but less) with mainstreamers on economics and non-economics matters. Perhaps we could have had more interaction with them during the more informal gatherings. Nevertheless, admittedly, it is not always easy to discuss with mainstreamers because there is an obvious asymmetry in the burden of interpretation. They think there is only one economics and one set of assumptions — which is theirs, so that they have no incentives to understand heterodox models and assumptions. Conversely, we heterodox folks are almost obliged (by institutions and power!) to speak their language if we want to discuss with them.
You can read all the papers here.
