The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases

Silvana Tenreyro and Vincent Sterk
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Vincent Sterk: University College London

No 76, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. We show that in an OLG setting, standard open market operations (OMO) carried by central banks have important revaluation effects that alter the level and distribution of wealth and the incentives to work and save for retirement. Specifically, expansionary OMO lead households to front-load their purchases of durable goods and work and save more, thus generating a temporary boom in durables, followed by a bust. The mechanism can account for the empirical responses of key macroeconomic variables to monetary policy interventions. Moreover, the model implies that different monetary interventions (e.g., OMO versus helicopter drops) can have different qualitative effects on activity. The mechanism can thus complement the NK paradigm. We study an extension of the model incorporating labor market frictions.

Date: 2014
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Related works:
Working Paper: The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases (2013)
Working Paper: The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases (2013)
Working Paper: The transmission of monetary policy operations through redistributions and durable purchases (2013)
Working Paper: The transmission of monetary policy operations through redistributions and durable purchases (2013)
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