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Household Income, Portfolio Choice and Heterogeneous Consumption Responses to Monetary Policy Shocks

Author

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  • Fumitaka Nakamura

    (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: fumitaka.nakamura@boj.or.jp))

Abstract
In order to analyze the transmission mechanism of monetary policy, a recent body of literature combines nominal rigidities with heterogeneous agent models. The key property of these models is that the income level of agents is heterogeneous. This paper quantifies the roles played by income level heterogeneity in the response of consumption to monetary policy shocks using U.S. household data. We show empirically that the response of consumption to expansionary monetary policy shocks is larger for high income households than low income households. This result cannot be explained by standard Aiyagari-Bewley-Huggett type heterogeneous agent models, where low income households have a higher marginal propensity to consume due to borrowing constraints. Empirical facts related to household characteristics suggest two potential channels: the presence of illiquid assets and heterogeneity in government transfers. Motivated by these empirical findings, we develop a model that incorporates illiquid assets and heterogeneity in government transfers. Simulations based on the model indicate that the presence of illiquid assets is essential for explaining the heterogeneous consumption response.

Suggested Citation

  • Fumitaka Nakamura, 2019. "Household Income, Portfolio Choice and Heterogeneous Consumption Responses to Monetary Policy Shocks," IMES Discussion Paper Series 19-E-19, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:19-e-19
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    File URL: https://www.imes.boj.or.jp/research/papers/english/19-E-19.pdf
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    References listed on IDEAS

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    Cited by:

    1. Fumitaka Nakamura & Nao Sudo & Yu Sugisaki, 2021. "Monetary Policy Shocks and the Employment of Young, Middle-Aged, and Old Workers," IMES Discussion Paper Series 21-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    2. Wu, Weixing & Zhao, Jing, 2022. "Economic policy uncertainty and household consumption: Evidence from Chinese households," Journal of Asian Economics, Elsevier, vol. 79(C).
    3. Nakamura, Fumitaka & Sudo, Nao & Sugisaki, Yu, 2024. "Assessing monetary policy surprises in Japan by high frequency identification," Journal of the Japanese and International Economies, Elsevier, vol. 71(C).
    4. Fumitaka Nakamura & Nao Sudo & Yu Sugisaki, 2021. "A Quest for Monetary Policy Shocks in Japan by High Frequency Identification," IMES Discussion Paper Series 21-E-02, Institute for Monetary and Economic Studies, Bank of Japan.

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    More about this item

    Keywords

    Consumption; Household income; Monetary policy; Liquidity;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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