Conclusion Behavioural biases afflict us all, in every activity from setting concrete to setting interest rates, from stress-testing steel to stress-testing banks. Central banks cannot be immune. Because central banks’ judgements affect society at large and in large ways, it is important there are institutional means of safeguarding against these biases. The Bank of England’s new policy framework is part of the response to that challenge. By design, it contains institutional safeguards against many of the biases most important for UK monetary and financial stability. But it is early days. In developing this framework further, three principles will be important – recognition, research and revision. Because behaviour biases are often unconscious, recognising them is crucial for building robustness. Put differently, denying their existence is proof of their importance! Research can help in identifying and understanding these biases and assessing institutional means of leaning against them. The Bank hopes to make a real behavioural change of its own on the research front in the years ahead. Armed with that research, the Bank should be better-placed to make revisions to policy. Historically, flexing policy frameworks has often been taken as a sign of regime failure. Quite the opposite ought to be the case. If the Bank’s policy machine is to be robust over time, it will need to evolve and flex. If central bank regimes are encased in glass, they are apt to shatter when next hit by a falling Rock. 64  Stockton (2012) also reaches this conclusion.
Debt-to-income ratio in different income groups 2016 Percentage of disposable income 400  400  350  350  300  300  250  250  200  200  150  150  100  100  50  50  0  0  1  2  3  4  5  6  7  8  9  10  Note. The columns show the median in each decile group. Data for July 2016. The high debt ratio in the lowest income group should be interpreted with a certain amount of caution, as this group includes, among others, households with highly varied incomes, for example households with negative income. Source: The Riksbank  In addition to households having different sizes of assets and liabilities that are affected by interest rates to different degrees, there may also be other dimensions that play a role in how the distribution of income and wealth is affected by a period of very expansionary monetary policy. For instance, one can imagine that household that are used to managing their assets and liabilities have better conditions for safeguarding themselves against or benefitting from the effects of monetary policy on interest rates and asset prices. However, the distributional effects of monetary policy do not come solely through changes in nominal interest rates and asset prices. Ultimately, it is the effect when consideration is given to inflation that is important. And the composition of household wealth is also significant in this context.