Wealth distribution and monetary policy

Net wealth is distributed differently across various age cohorts in European countries. The net wealth distribution pattern in Western EU countries conforms to the life cycle hypothesis, whereas net wealth accumulation peaks at earlier ages in Eastern European countries. This study investigates the underlying reasons for these differences in net wealth distribution and evaluates how they affect monetary policy transmission. To this end, we develop a modified New Keynesian model with a multiperiod overlapping generations demand side to account for demographic and productivity-gap factors, analyzing their interactions with monetary policy within a general equilibrium setting. Using the Household Finance and Consumption Survey database, we calibrate the model for two sets of European countries and replicate the shape of net wealth distribution. Our findings suggest that the shape of net wealth distribution by age significantly determines monetary policy effectiveness and should be considered when designing and implementing monetary policy.