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The Transmission of Monetary Policy through Redistributions and Durable Purchases

Author

Listed:
  • Vincent Sterk

    (University College London)

  • Silvana Tenreyro

    (London School of Economics)

Abstract

This paper studies a redistribution channel for the transmission of monetary policy. Using a tractable OLG setting in which the government is a net debtor, we show that standard open market operations (OMO) conducted by Central Banks have significant revaluation effects that alter the level and distribution of wealth in the economy and the real interest rate. Specifically, expansionary OMO generate a negative wealth effect (the private sector as a whole is a net creditor to the government), increasing households’ incentives to save for retirement and pushing down the real interest rate. This, in turn, leads to a substitution towards durables, generating a temporary boom in the durable good sector. With search and matching frictions, a form of productive investment is added to the model and the fall in interest rates causes an increase in labour demand, raising aggregate employment. The mechanism can mimic the empirical responses of key macroeconomic variables to monetary policy interventions. The model shows that different monetary interventions (e.g., OMO versus helicopter drops) can have sharply different effects on activity.

Suggested Citation

  • Vincent Sterk & Silvana Tenreyro, 2016. "The Transmission of Monetary Policy through Redistributions and Durable Purchases," Working Papers 1601, Council on Economic Policies.
  • Handle: RePEc:ceq:wpaper:1601
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    Cited by:

    1. Gianluca Violante & Benjamin Moll & Greg Kaplan, 2015. "Monetary Policy According to HANK," 2015 Meeting Papers 1507, Society for Economic Dynamics.
    2. Silvana Tenreyro & Gregory Thwaites, 2016. "Pushing on a String: US Monetary Policy Is Less Powerful in Recessions," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 43-74, October.
    3. Roine Vestman & Matilda Kilström & Josef Sigurdsson & Martin Floden, 2016. "Household Debt and Monetary Policy: Revealing the Cash-Flow Channel," 2016 Meeting Papers 1015, Society for Economic Dynamics.
    4. Cloyne, James & Ferreira, Clodomiro & Surico, Paolo, 2015. "Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism," CEPR Discussion Papers 11023, C.E.P.R. Discussion Papers.
    5. Galo Nuño & Carlos Thomas, 2016. "Optimal monetary policy with heterogeneous agents," Working Papers 1624, Banco de España;Working Papers Homepage.
    6. Kurt Mitman & Iourii Manovskii & Marcus Hagedorn, 2017. "Monetary Policy in Incomplete Market Models: Theory and Evidence," 2017 Meeting Papers 1605, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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