Life-cycle Forces make Monetary Policy Transmission Wealth-centric

Paul Beaudry, Paolo Cavallino and Tim Willems

No 32511, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper adds life-cycle features to a New Keynesian model and shows how this places financial wealth at the center of consumption/saving decisions, thereby enriching the determinants of aggregate demand and affecting the transmission of monetary policy. As retirement preoccupations strengthen, the potency of conventional monetary policy declines and depends more on the response of asset prices (supporting central banks closely monitoring the impact of monetary policy on asset prices). Especially “low/high for long” policies are shown to often have only muted effects on economic activity due to offsetting income and substitution effects of interest rates, in a way that can be compounded by Quantitative Easing. We also show why the presence of life-cycle forces can favor a monetary policy strategy which stabilizes asset prices in response to financial shocks. Being explicit about the role of retirement savings in aggregate demand therefore offers new perspectives on several aspects of monetary interventions.

JEL-codes: E21 E43 E52 G51 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
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