Heterogeneous Households and the Portfolio Rebalancing Channel of Monetary Policy

Matteo Leombroni and Ciaran Rogers
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Matteo Leombroni: Stanford
Ciaran Rogers: Stanford University

No 684, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We study the heterogeneity of consumption responses across households to a common monetary policy shock. Households vary in age, wealth and ex-ante asset allocation. We combine an asset pricing framework with heterogeneous agents and incomplete markets with a life-cycle model. Within our environment, the transmission of monetary policy does not only work through the usual income and substitution motives, but also through an endogenous portfolio rebalancing effect which generates changes in equilibrium asset prices and a subsequent wealth effect on consumption. We find that, if the shock is such that prices are unchanged, the response of consumption is fully transitory, where younger households increase, and older households decrease, consumption. If equilibrium prices rise as a result of the monetary shock, wealth effects mitigate heterogeneity in current consumption responses, but introduce persistence in responses that increase significantly with age.

Date: 2019
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:684

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