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The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases

Author

Listed:
  • Vincent Sterk

    (University College London (UCL), Department of Economics
    Centre for Macroeconomics (CFM))

  • Silvana Tenreyro

    (London School of Economics (LSE), Centre for Economic Performance (CEP)
    Centre for Macroeconomics (CFM))

Abstract
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 front-load 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.

Suggested Citation

  • Vincent Sterk & Silvana Tenreyro, 2013. "The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases," Discussion Papers 1305, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1305
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    References listed on IDEAS

    as
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    Cited by:

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    2. Iván Werning, 2015. "Incomplete Markets and Aggregate Demand," NBER Working Papers 21448, National Bureau of Economic Research, Inc.
    3. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    4. Yunus Aksoy & Henrique S. Basso & Ron P. Smith & Tobias Grasl, 2019. "Demographic Structure and Macroeconomic Trends," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 193-222, January.
    5. Garriga, Carlos & Kydland, Finn E. & Šustek, Roman, 2016. "Nominal rigidities in debt and product markets," LSE Research Online Documents on Economics 86223, London School of Economics and Political Science, LSE Library.
    6. Emmanuel Farhi & Iván Werning, 2019. "Monetary Policy, Bounded Rationality, and Incomplete Markets," American Economic Review, American Economic Association, vol. 109(11), pages 3887-3928, November.
    7. Sergeyev, Dmitriy & Iovino, Luigi, 2018. "Central Bank Balance Sheet Policies Without Rational Expectations," CEPR Discussion Papers 13100, C.E.P.R. Discussion Papers.
    8. Carlos Garriga & Finn E. Kydland & Roman Šustek, 2017. "Mortgages and Monetary Policy," The Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3337-3375.
    9. Cantelmo, Alessandro & Melina, Giovanni, 2018. "Monetary policy and the relative price of durable goods," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 1-48.
    10. Carlos Garriga & Finn E. Kydland & Roman Šustek, 2017. "Mortgages and Monetary Policy," Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3337-3375.
    11. Marco Di Maggio & Amir Kermani & Christopher Palmer, 2016. "How Quantitative Easing Works: Evidence on the Refinancing Channel," NBER Working Papers 22638, National Bureau of Economic Research, Inc.
    12. James Cloyne & Clodomiro Ferreira & Paolo Surico, 2020. "Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(1), pages 102-129.
    13. Rodney Ramcharan & Amir Kermani & Marco Di Maggio, 2015. "Monetary Policy Pass-Through: Household Consumption and Voluntary Deleveraging," 2015 Meeting Papers 256, Society for Economic Dynamics.
    14. Miles, David & Schanz, Jochen, 2014. "Should central banks provide reserves via repos or outright bond purchases?," CEPR Discussion Papers 10229, C.E.P.R. Discussion Papers.
    15. Daniel Murphy, 2015. "How Can Government Spending Stimulate Consumption?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 551-574, July.

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    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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