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Life-cycle Forces make Monetary Policy Transmission Wealth-centric

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Listed:
  • Paul Beaudry
  • Paolo Cavallino
  • Tim Willems

Abstract

This paper adds life-cycle features to a New Keynesian model and shows how this places financial wealth at the center of consumption/saving decisions, thereby enriching the determinants of aggregate demand and affecting the transmission of monetary policy. As retirement preoccupations strengthen, the potency of conventional monetary policy declines and depends more on the response of asset prices (supporting central banks closely monitoring the impact of monetary policy on asset prices). Especially “low/high for long” policies are shown to often have only muted effects on economic activity due to offsetting income and substitution effects of interest rates, in a way that can be compounded by Quantitative Easing. We also show why the presence of life-cycle forces can favor a monetary policy strategy which stabilizes asset prices in response to financial shocks. Being explicit about the role of retirement savings in aggregate demand therefore offers new perspectives on several aspects of monetary interventions.

Suggested Citation

  • Paul Beaudry & Paolo Cavallino & Tim Willems, 2024. "Life-cycle Forces make Monetary Policy Transmission Wealth-centric," NBER Working Papers 32511, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32511
    Note: EFG ME
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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