While saved money finds its way back into the economy in other ways -- money parked at banks can be lent, for instance -- at the end of the day, money may stimulate less demand in the hands of the rich because the overall demand in the economy for discretionary products and services is reduced.
“It’s a kind of chicken and egg thing -- just having money in the bank doesn’t mean that there are profitable lending opportunities,” said John Schmitt, research director at the Washington Center for Equitable Growth. “If they’re sitting on all this money, they have a sense that there’s not enough demand out there.”
What’s up for debate is how significant of a factor inequality is in actually lowering rates. Eggertsson said that his preliminary works suggests it has played some role, and he suspects that it’s “non-trivial” -- though the research will need to bear that out.
Not everyone agrees. Former Minneapolis Fed President Narayana Kocherlakota said that while the prospect that inequality is lowering the neutral rate is “very interesting argument and it’s one that’s worth pursuing -- it’s not one that immediately strikes me as being compelling.”
Kocherlakota, who is a Bloomberg View columnist, reasons that inequality has been climbing for a long time, yet the neutral rate’s major moves, based on most models, have come since the financial crisis. Others, including Schmitt, argue that inequality’s full effects didn’t manifest themselves in the run-up to the housing crash because middle-class households boosted borrowing and spent out of their home wealth to mask their falling share of overall national income.
Silver Lining
It could create room for action if inequality is part of the reason interest rates are lower. Fiscal policies can be designed to lessen inequality. There’s no real solution to structural forces that have pushed down neutral rates, like the aging of the population.
“Some of these forces are unlikely to revert back,” Eggertsson said. And society may find that it wants natural rates higher, because the lower they are, the less ammunition monetary policy can provide in a crisis. “We’re one shock away from hitting the zero bound again -- that can create difficulties.”