Household Income, Portfolio Choice, and Heterogeneous Consumption Responses to Monetary Policy Shocks

This paper quantifies the roles played by income‐level heterogeneity in the response of consumption to monetary policy shocks using U.S. household data. We show empirically that the response of consumption to expansionary monetary policy shocks is larger for high‐income households than for low‐income households. Empirical facts related to household characteristics suggest two channels: the presence of illiquid assets and heterogeneity in government transfers. Motivated by these empirical findings, we develop a model that incorporates illiquid assets and heterogeneity in government transfers to quantify the importance. Simulations based on the model indicate that the presence of illiquid assets, whose return increases in response to expansionary monetary shocks, is essential for explaining the heterogeneous consumption response.