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Transmission of Monetary Policy with Heterogeneity in Household Portfolios

Author

Listed:
  • Ralph Luetticke

    (Centre for Macroeconomics (CFM)
    University College London (UCL))

Abstract
Monetary policy affects both intertemporal consumption choices and portfolio choices between liquid and illiquid assets. The monetary transmission, in turn, depends on the distribution of marginal propensities to consume and invest. This paper assesses the importance of heterogeneity in these propensities for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different degrees of liquidity. Liquidity-constrained households have high propensities to consume but low propensities to invest, which makes consumption more and investment less responsive to monetary shocks compared to complete markets. Redistribution through earnings heterogeneity and the Fisher channel from unexpected inflation further amplifies the consumption response but dampens the investment response.

Suggested Citation

  • Ralph Luetticke, 2018. "Transmission of Monetary Policy with Heterogeneity in Household Portfolios," Discussion Papers 1819, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1819
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    More about this item

    Keywords

    Monetary policy; Heterogeneous agents; General equilibrium;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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

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    1. Transmission of Monetary Policy with Heterogeneity in Household Portfolios (AEJ:MA 2021) in ReplicationWiki

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