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Heterogeneous Households and the Portfolio Rebalancing Channel of Monetary Policy

Author

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  • Matteo Leombroni

    (Stanford)

  • Ciaran Rogers

    (Stanford University)

Abstract

We study the heterogeneity of consumption responses across households to a common monetary policy shock. Households vary in age, wealth and ex-ante asset allocation. We combine an asset pricing framework with heterogeneous agents and incomplete markets with a life-cycle model. Within our environment, the transmission of monetary policy does not only work through the usual income and substitution motives, but also through an endogenous portfolio rebalancing effect which generates changes in equilibrium asset prices and a subsequent wealth effect on consumption. We find that, if the shock is such that prices are unchanged, the response of consumption is fully transitory, where younger households increase, and older households decrease, consumption. If equilibrium prices rise as a result of the monetary shock, wealth effects mitigate heterogeneity in current consumption responses, but introduce persistence in responses that increase significantly with age.

Suggested Citation

  • Matteo Leombroni & Ciaran Rogers, 2019. "Heterogeneous Households and the Portfolio Rebalancing Channel of Monetary Policy," 2019 Meeting Papers 684, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:684
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    References listed on IDEAS

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