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Title: The Transmission of Monetary Policy through Redistributions and Durable Purchases

Author(s): Vincent Sterk and Silvana Tenreyro

Publication Date: August 2015

Keyword(s): durable goods, monetary policy, open market operations, redistributive effects of monetary policy and transmission mechanism

Programme Area(s): Monetary Economics and Fluctuations

Abstract: 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.

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Bibliographic Reference

Sterk, V and Tenreyro, S. 2015. 'The Transmission of Monetary Policy through Redistributions and Durable Purchases'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10785