The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases
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 frontload 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.
|Date of creation:||Dec 2013|
|Date of revision:|
|Contact details of provider:|| Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Peter N. Ireland, 2005.
"The liquidity trap, the real balance effect, and the Friedman rule,"
05-3, Federal Reserve Bank of Boston.
- Peter N. Ireland, 2005. "The Liquidity Trap, The Real Balance Effect, And The Friedman Rule ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1271-1301, November.
- Yann Algan & Olivier Allais & Edouard Challe & Xavier Ragot, 2012.
"Monetary Shocks Under Incomplete Markets,"
- Bernanke, Ben S & Blinder, Alan S, 1992.
"The Federal Funds Rate and the Channels of Monetary Transmission,"
American Economic Review,
American Economic Association, vol. 82(4), pages 901-21, September.
- Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
- Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
- Mark Bils & Peter J. Klenow, 2004.
"Some Evidence on the Importance of Sticky Prices,"
Journal of Political Economy,
University of Chicago Press, vol. 112(5), pages 947-985, October.
- Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
- Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-39, November.
- Ascari, Guido & Rankin, Neil, 2004.
"Perpetual youth and endogenous labour supply: a problem and a possible solution,"
Working Paper Series
0346, European Central Bank.
- Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
- John Silvia & Lorenz Kueng & Olivier Coibion & Yuriy Gorodnichenko, 2012.
"Innocent Bystanders? Monetary Policy and Inequality in the U.S,"
IMF Working Papers
12/199, International Monetary Fund.
- Coibion, Olivier & Gorodnichenko, Yuriy & Kueng, Lorenz & Silvia, John, 2012. "Innocent Bystanders? Monetary Policy and Inequality in the U.S," IZA Discussion Papers 6633, Institute for the Study of Labor (IZA).
- Olivier Coibion & Yuriy Gorodnichenko & Lorenz Kueng & John Silvia, 2012. "Innocent Bystanders? Monetary Policy and Inequality in the U.S," NBER Working Papers 18170, National Bureau of Economic Research, Inc.
- Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
- Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
- Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
- Ben S. Bernanke & Mark Gertler, 1995.
"Inside the Black Box: The Credit Channel of Monetary Policy Transmission,"
Journal of Economic Perspectives,
American Economic Association, vol. 9(4), pages 27-48, Fall.
- Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
- Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
- 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, vol. 20(1), pages 41-80, February.
- Cass, David & Okuno, Masahiro & Zilcha, Itzhak., . "The Role of Money in Supporting the Pareto Optimality of Competitive Equilibrium in Consumption-Loan Type Models," Working Papers 242, California Institute of Technology, Division of the Humanities and Social Sciences.
- Matteo Iacoviello, 2002.
"House prices, borrowing constraints and monetary policy in the business cycle,"
Boston College Working Papers in Economics
542, Boston College Department of Economics, revised 06 Dec 2004.
- Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
- Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
- Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
- Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-55, February.
- 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, vol. 20(3), pages 475-499, December.
When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp1249. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.