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Monetary Policy and Wealth Effects

Author

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  • Nicolas Caramp
  • Dejanir H. Silva

    (Department of Economics, University of California Davis)

Abstract

This paper studies the role of wealth effects in the monetary transmission mechanism in New Keynesian models. We propose a decomposition of consumption that extends the Slutsky equation to a general equilibrium setting. Wealth effects, and their amplification in general equilibrium, explain a large fraction of the consumption and inflation response to changes in nominal interest rates in the standard equilibrium. In RANK, wealth effects are determined, generically, by the revaluation of public debt and the fiscal response to monetary policy. In a medium-scale DSGE model, we find a fiscal response that is several times larger than the response we estimate in the data. Therefore, the model is unable to generate sufficiently strong effects. In an analytical HANK model with positive private debt, private wealth effects amplify the response to monetary policy and improve the quantitative performance of the DSGE model.

Suggested Citation

  • Nicolas Caramp & Dejanir H. Silva, 2020. "Monetary Policy and Wealth Effects," Working Papers 337, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:337
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    File URL: https://repec.dss.ucdavis.edu/files/LYgsvp2MLYhnaR9Hd9jjTX2o/wealth-effects.pdf
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    References listed on IDEAS

    as
    1. Jiang, Zhengyang & Lustig, Hanno & Van Nieuwerburgh, Stijn & Xiaolan, Mindy Z., 2019. "The Government Risk Premium Puzzle," Research Papers 3831, Stanford University, Graduate School of Business.
    2. Sushant Acharya & Keshav Dogra, 2020. "Understanding HANK: Insights From a PRANK," Econometrica, Econometric Society, vol. 88(3), pages 1113-1158, May.
    3. Tobias Broer & Niels-Jakob Harbo Hansen & Per Krusell & Erik Öberg, 2020. "The New Keynesian Transmission Mechanism: A Heterogeneous-Agent Perspective," Review of Economic Studies, Oxford University Press, vol. 87(1), pages 77-101.
    4. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    5. Pierpaolo Benigno & Gauti B. Eggertsson & Federica Romei, 2020. "Dynamic Debt Deleveraging and Optimal Monetary Policy," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 310-350, April.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Monetary Policy and Wealth Effects
      by Christian Zimmermann in NEP-DGE blog on 2020-02-18 14:56:48

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      More about this item

      Keywords

      New Keynesian; Monetary Policy; Fiscal Policy; Wealth Effects;
      All these keywords.

      JEL classification:

      • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
      • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
      • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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