Using the Classical Equation of Exchange and Cantillon Effects to Help Understand the Inequality Created by an Increasingly Active Central Bank Monetary Policy

Abstract

In this paper we use the classical equation of exchange to illustrate the two channels into which monetary expansion can be realized: in the real economy as employment creation or in asset markets as appreciations. Cantillon effects can help us to understand the asset market channel and how this channel, understudied historically but gaining attention recently, may be longer lasting and therefore may lead to greater inequality. Next we use this theoretical background to survey the increasingly active central bank monetary policy in historical periods, especially since the housing boom-and-bust leading to the Great Recession and as exacerbated in the covid-era. We conclude by offering alternatives to today’s monetary regime.

Keywords: Central Banking, Monetary Policy, Asset Bubbles, Inequality, Cantillon Effects, Political Economy

JEL Classification: A11, D31, E42, E58, N12