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The transmission of monetary policy through redistributions and durable purchases

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  • Sterk, Vincent
  • Tenreyro, Silvana

Abstract

Using a tractable OLG model with government debt, we study a redistribution channel for the transmission of monetary policy. Expansionary open-market operations generate a negative wealth effect, increasing households' incentives to save and pushing down the real interest rate. This leads to a substitution towards durables, generating a temporary boom in the durable-good sector. With search and matching frictions, the fall in interest rates causes an increase in labor demand, raising aggregate employment. The model mimics the empirical responses of key macroeconomic variables to monetary policy interventions. The fiscal policy stance plays a key role in the transmission mechanism.

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  • Sterk, Vincent & Tenreyro, Silvana, 2018. "The transmission of monetary policy through redistributions and durable purchases," LSE Research Online Documents on Economics 89056, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:89056
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    More about this item

    Keywords

    Open Market Operations; Durables; Heterogeneous Agents;
    All these keywords.

    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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