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Transmission of Monetary Policy with Heterogeneity in Household Portfolios

Ralph Luetticke ()
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Ralph Luetticke: Centre for Macroeconomics (CFM)

No 1819, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: Monetary policy affects both intertemporal consumption choices and portfolio choices between liquid and illiquid assets. The monetary transmission, in turn, depends on the distribution of marginal propensities to consume and invest. This paper assesses the importance of heterogeneity in these propensities for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different degrees of liquidity. Liquidity-constrained households have high propensities to consume but low propensities to invest, which makes consumption more and investment less responsive to monetary shocks compared to complete markets. Redistribution through earnings heterogeneity and the Fisher channel from unexpected inflation further amplifies the consumption response but dampens the investment response.

Keywords: Monetary policy; Heterogeneous agents; General equilibrium (search for similar items in EconPapers)
JEL-codes: E21 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-knm, nep-mac and nep-mon
Date: 2018-06
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