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The redistributive effects of monetary policy in an overlapping generations model

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  • Baek, Seungjun

Abstract

I study the redistributive effects of monetary policy with attention to a wealth effect for savers generated by a cut in interest rates. To this end, I build a full-fledged overlapping generations New Keynesian model (OLGNK) that features marginal propensity to consume (MPC) heterogeneity, financial frictions, and precautionary saving behavior. The model is calibrated to match the U.S. demographic structure and yields empirically realistic MPCs and inequality among households. I find that a negative wealth effect resulting from an interest rate cut for savers is substantial, which dampens the impulse responses of aggregate output relative to those in a representative agent New Keynesian (RANK) model. This finding is in contrast to a heterogeneous agent New Keynesian (HANK) model, in which there is amplification of monetary policy relative to RANK.

Suggested Citation

  • Baek, Seungjun, 2023. "The redistributive effects of monetary policy in an overlapping generations model," European Economic Review, Elsevier, vol. 155(C).
    • Handle: RePEc:eee:eecrev:v:155:y:2023:i:c:s0014292123000624
    DOI: 10.1016/j.euroecorev.2023.104433
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    More about this item

    Keywords

    Monetary policy; Redistribution; Overlapping generations; Financial friction; Retirement; Life cycle;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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