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  4. April 2021
  5. Transmission of Monetary Policy with Heterogeneity in Household Portfolios

Transmission of Monetary Policy with Heterogeneity in Household Portfolios

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Abstract

This paper assesses the importance of heterogeneity in household portfolios for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different liquidity. In this environment, monetary transmission works through investment, but redistribution lowers the elasticity of investment via two channels: (i) heterogeneity in marginal propensities to invest, and (ii) time variation in the liquidity premium. Monetary contractions redistribute to wealthy households who have high propensities to invest and a low marginal value of liquidity, thereby stabilizing investment. I provide empirical evidence for countercyclical liquidity premia and heterogeneity in household portfolio responses.

Citation

Luetticke, Ralph. 2021. "Transmission of Monetary Policy with Heterogeneity in Household Portfolios." American Economic Journal: Macroeconomics, 13 (2): 1-25. DOI: 10.1257/mac.20190064

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E32 Business Fluctuations; Cycles
  • E52 Monetary Policy
  • G11 Portfolio Choice; Investment Decisions
  • G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
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