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The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases

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  • Vincent Sterk

    ()
    (University College London (UCL), Department of Economics
    Centre for Macroeconomics (CFM))

  • Silvana Tenreyro

    ()
    (London School of Economics (LSE), Centre for Economic Performance (CEP)
    Centre for Macroeconomics (CFM))

Abstract

A large literature has documented statistically significant effects of monetary policy on economic activity. 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.

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Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1305.

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Length: 52 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:cfm:wpaper:1305

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  1. Cass, David & Okuno, Masahiro & Zilcha, Itzhak, 1979. "The role of money in supporting the pareto optimality of competitive equilibrium in consumption-loan type models," Journal of Economic Theory, Elsevier, Elsevier, vol. 20(1), pages 41-80, February.
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  14. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, Econometric Society, vol. 47(6), pages 1433-39, November.
  15. Danthine, Jean-Pierre & Donaldson, John B. & Smith, Lance, 1987. "On the superneutrality of money in a stochastic dynamic macroeconomic model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(3), pages 475-499, December.
  16. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics, Boston College Department of Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  17. Peter Ireland, 2005. "The liquidity trap, the real balance effect, and the Friedman rule," Working Papers, Federal Reserve Bank of Boston 05-3, Federal Reserve Bank of Boston.
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