The redistributive effects of monetary policy in an overlapping generations model

Seungjun Baek

European Economic Review, 2023, vol. 155, issue C

Abstract: I study the redistributive effects of monetary policy with attention to a wealth effect for savers generated by a cut in interest rates. To this end, I build a full-fledged overlapping generations New Keynesian model (OLGNK) that features marginal propensity to consume (MPC) heterogeneity, financial frictions, and precautionary saving behavior. The model is calibrated to match the U.S. demographic structure and yields empirically realistic MPCs and inequality among households. I find that a negative wealth effect resulting from an interest rate cut for savers is substantial, which dampens the impulse responses of aggregate output relative to those in a representative agent New Keynesian (RANK) model. This finding is in contrast to a heterogeneous agent New Keynesian (HANK) model, in which there is amplification of monetary policy relative to RANK.

Keywords: Monetary policy; Redistribution; Overlapping generations; Financial friction; Retirement; Life cycle (search for similar items in EconPapers)
JEL-codes: D31 E12 E21 E44 E52 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:155:y:2023:i:c:s0014292123000624

DOI: 10.1016/j.euroecorev.2023.104433

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