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The transmission of monetary policy through redistributions and durable purchases

Vincent Sterk and Silvana Tenreyro

Journal of Monetary Economics, 2018, vol. 99, issue C, 124-137

Abstract: Using a tractable OLG model with government debt, we study a redistribution channel for the transmission of monetary policy. Expansionary open-market operations generate a negative wealth effect, increasing households’ incentives to save and pushing down the real interest rate. This leads to a substitution towards durables, generating a temporary boom in the durable-good sector. With search and matching frictions, the fall in interest rates causes an increase in labor demand, raising aggregate employment. The model mimics the empirical responses of key macroeconomic variables to monetary policy interventions. The fiscal policy stance plays a key role in the transmission mechanism.

Keywords: Open market operations; Durables; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: E1 E52 E58 E32 E31 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.jmoneco.2018.07.003

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Handle: RePEc:eee:moneco:v:99:y:2018:i:c:p:124-137