Distributional Effects of Monetary Policy: An Opportunity for Austrian Economics

by Sebastian Müller

For a long time, Austrian macro had a unique selling point in what might be called the ‘money matters’ view: referring to the notion that changes in the money supply by their very nature can never be said to be neutral. Yeager (1997) and Horwitz (2000) describe the Austrian stance as a “fluttering veil”. On the one hand, it incorporates the belief that prosperity cannot be generated through an expansion of the money supply in the long-run (long-run neutrality of money). On the other hand, changes in the money supply have real effects (short-run non-neutrality).

This proposition can be traced back to the works of classical economists such as Hume (1970), Mill (1909), Cairnes (1873), and Cantillon (1755).[i] In his essay on economic theory, Cantillon (1755) points out that an expansion of the money supply necessarily entails distributional effects as first receivers of the newly created money benefit compared to those ones further down the line.

“Changes in the money relation, i.e., in the relation of the demand for and the supply of money, affect the exchange ratio between money on the one hand and the vendible commodities on the other hand. These changes do not affect at the same time and to the same extent the prices of the various commodities and services. They consequently affect the wealth of the various members of society in different ways.”

(Mises 2007)

Influenced by the classical economists, this thought was taken up by Ludwig von Mises and F.A. Hayek who extended early approaches by developing the Austrian theory of the business cycle (ABCT). Considering interest rates as the most relevant prices in the economy, they realized that changes in the money supply through credit policies are of importance for an understanding of boom-and-bust cycles. Following the ABCT, changes in the money stock (or interest rates) alter the structure of production and initiate structural distortions (and thus distributional effects) in the medium- to long-term perspective. Hayek’s triangle will come to mind here. Newer Austrian research uses, for example, the concept of ‘financial duration’ to investigate distributional effects at the cross-sectional level (here, here and here).

Up to recently, few Non-Austrian economists considered distributional effects of monetary policy worth studying. Some economists upheld the money neutrality view. The stock of money or changes in the growth rate of the money supply were considered to have no influence on real outcomes (money neutrality and super-neutrality of money). Others conceived monetary policy primarily as a tool to smooth the business cycle by attenuating the harmful effects of market imperfections and sticky prices in the short run or eliminating negative effects of (unexpected) macroeconomic shocks (New Keynesian View).  Little was discussed the role of monetary policy as a potential source of structural distortions, disequilibria or any long-term distributional effects.[ii]

But things were about to change.

The unexpected outbreak of the financial crisis of 2007, the subsequent interest rates cuts and the looming threat of deflation prompted central bankers to implement new monetary policy measures. Those measures were in parts directly targeted to certain markets or agents (governments, banks, and large enterprises). Moreover, Thomas Piketty’s medial success around the world evoked the interest in distributional effects and inequality. With the extended monetary policy toolkit and the new interest in distributional effects, new research projects emerged which combined monetary policy and inequality. Many economists do not fit in the dichotomy anymore. They (implicitly) object to the idea of money being neutral and investigate whether the new measures adopted by central banks are creating an uneven playing-field and causing (re)distributional effects.

For Austrians this is a reason for delight and an immense opportunity.

It is a delight because distributional effects are recognized and taken up by a large variety of economists. Many economists are challenging the traditional view of money neutrality trying to investigate and isolate potential distributional channels. The old paradigm is dwindling and science progresses. The opportunity lies in extending the Austrian analysis toward distributional effects not studied before. Up to recently, Austrians that looked beyond structural distortions when it comes to distributional effects were on the fringes. Transmission channels of monetary policy to income/wealth distribution were hardly given center stage. Many did not even move beyond Hayek’s old triangle concept. Austrian economists should embrace the opportunity to advance Austrian Economics as a progressive research program.

It’s not too late to jump on the bandwagon. The current surge of papers investigating distributional effects of monetary policy is not the result of an increased recognition or awareness of the Austrian perspective but rather of pragmatic nature. Thus, Austrian economists who engage in these issues might get a genuine opportunity to enrich the current literature and articulate their ideas beyond their circles.

In addition, the literature is still in its infancy and has not provided a clear-cut picture (an overview can be found here). On the one side, the authors suggest a positive relationship between monetary policy and inequality (see here, here and here). On the other side, it is argued that specifically crisis policies have only weak and offsetting effects and might actually lead to a reduction in inequality (here and here). So far, the general opinion seems to follow the second view regarding distributional effects to be of a small magnitude and thus, compared to other factors, negligible.

“The degree of inequality we see today is primarily the result of deep structural changes in our economy that have taken place over many years, including globalization, technological progress, demographic trends, and institutional change in the labor market and elsewhere. By comparison to the influence of these long-term factors, the effects of monetary policy on inequality are almost certainly modest and transient.”

(Bernanke 2015)

As long as the economic literature is not able to provide a clear-cut picture about the issue at hands, distributional effects are likely to remain a contested topic. Ambiguous results evoke the danger that policymakers and central bankers are invited to interpret them in an arbitrary way which fits their political agenda or policy goals. This is troublesome from an Austrian perspective.



Bernanke, Ben. (2015). Monetary policy and inequality. Ben Bernanke’s Blog at Brookings.

Cantillon, Richard (2010). An Essay on Economic Theory: An English Translation of Richard Cantillon’s Essai sur la nature du commerce en général. Auburn: Ludwig von Mises Institute.

Cairnes, John E. (1873). Essays in Political Economy. London: Macmillan and Company, pp. 1-65.

Horwitz, Steven (2000). Microfoundations and macroeconomics. London: Routledge.

Hume, David (1970). On Money. In Writings on Economics, Eugene Rotwein, ed. Madison: University of Wisconsin Press, pp. 33–46.

Mill, John Stuart (1909). Principles of Political Economy, Sir William Ashley, ed. (1909), bk. 3, chap. 8.

Mises, Ludwig von (2007). Human Action. Indianapolis: Liberty Fund.

Yeager, Leland B. (1997). The fluttering veil. Essays on Monetary Disequilibrium. Indianapolis: Liberty Fund.


[i] Although classical economists are believed to hold some kind of money neutrality view in the long run (that the stock of money does not affect real economic outcomes in the long run), they seem to have already been aware of potential distributional effects resulting from changes of the money stock.

[ii] One notable exception is the work of Borio and White (here and here) who warn against the harmful effects of too loose monetary conditions and the build-up of (financial) imbalances.



11 thoughts on “Distributional Effects of Monetary Policy: An Opportunity for Austrian Economics

  1. The person who receives $100 from the Fed simultaneously hands over a $100 bond to the Fed, leaving his net worth unaffected. At the same time, the Fed’s newly acquired $100 bond provides backing for the $100 of newly-issued cash, so the value of the dollar is unaffected, and there is no possibility of wealth effects.

  2. This has been going on since Hume and Mill? Centuries ago? And the economists still don’t understand it? They disagree and are studying it all? This is nonsense–Abstractions, theories, BS!

    It’s like they say, You can lay all the economists end-to-end and they still won’t reach a conclusion!

    The economy is based on the actions of the people, businesses, and active participants. Those workers deserve a government that will maintain a steady money supply, safe financial institutions, the rule of law, honest politicians, a level playing field, and no attempts at manipulation by the experts in Washington! No abstractions needed.

  3. Mr. Sproul was is wrong on two counts. The Austrians rely on relative price effects. Not a wealth effect. The original post makes that clear.

    Second, we have understood since Penske and Savings that the swap of a bond for outside money can have real effects.

  4. The Austrians’ mistake is ” that an expansion of the money supply necessarily entails distributional effects as first receivers of the newly created money benefit compared to those ones further down the line.” There is no such effect, since the new money causes no change in prices.

    I presume you meant Pesek and Saving, and their erroneous distinction between outside and inside money. They misunderstand that when a bank (any bank) issues 10% more money, the bank normally gets 10% more assets in exchange, so both sides of the balance sheet expand equally and there is no effect on the value of money.

  5. As the article’s author admits: “the literature is still in its infancy and has not provided a clear-cut picture. . . The old paradigm is dwindling and science progresses.” Admittedly, the subject is mired in confusion, and such alleged “progress” fails to impress most observers. As the above comments from Sproul and O’Driscoll indicate, there is no settled science here. Just debate over vague assumptions about what happens to money and bonds as they come and go–In fact, it all depends on what businesses and people do with their money–and there are few experts who can predict that factor.

    As the author observes, “Ambiguous results evoke the danger that policymakers and central bankers are invited to interpret them in an arbitrary way which fits their political agenda or policy goals.” Indeed, almost all economic.theories are discredited by the obvious political bias of their proponents.. Unfortunately, the “soft scientists,” as Thomas Sowell describes those in such fields as economics, politics, and history, do not observe the scientific method that has worked so well in the hard sciences like math, physics, engineering, and chemistry. Like Lord Keynes, they might assume, for one example, that flooding the country with liquid assets, (sometimes attractively labeled as “stimulus plans,” or “priming the pump,” or “greasing the skids,”) will foster prosperity. Others might say it will just spiral the deficit and end in bankruptcy. It depends in large part on their differing political bias–(and for many, since their livelihood is dependent on the illusion that they can fine tune the economy, they must advance theories on just how they could do that).

    I lean toward some of what the Austrian School advocates, but it can be seen from the above article and comments that no one even agrees on what the Austrian advocates would do or even what they advance. It may be a “truth” that there is no economic theory that is agreed on by its practitioners. It is all about interpretation, models, studies, statistics, and damn statistics. The weather forecasters (and tea leaves?) perform as well or better. (For more on the failure of all experts to predict anything, see Dan Gardner’s “Future Babble–Why Pundits are Hedgehogs and Foxes Know Best.”)

    If economists were really expert in their field, in a useful fashion, more than a handful would have foreseen the 2008 mortgage melt-down which almost bankrupted the nation’s largest banks, and added a trillion dollars to our national deficit/debt. In fact, most “experts” in economics and banking at the time approved the infusion of easy credit to high-risk borrowers, the packaging and peddling of sub-prime loans, and the federal government policies that subsidized the whole bubble and bust scenario. It is arguable that an ordinary businessman or woman, with little academic training, could have overseen the situation more wisely and prudently.

  6. I have always found it interesting how these economic principles developed by the Austrian school of economics still have a place within today’s economy. It is interesting that the business cycle can tell us about crowding out, when high interest rates result in a decreased borrowing for consumers.

  7. As Bill said in the earlier comments, ” It may be a “truth” that there is no economic theory that is agreed on by its practitioners. It is all about interpretation, models, studies, statistics, and damn statistics.” The Australian business cycle interprets these models, studies and such to predict the repercussions of banks’s forced rates. It’ll be interesting to see what Austrian analysis of distributional effects turns out as the literature develops further. The debate between monetary policy and inequality will surely also continue as the real interest rate changes.

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