DP11233 Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy

Author(s): Nils Gornemann, Keith Kuester, Makoto Nakajima
Publication Date: April 2016
Keyword(s): General Equilibrium, Heterogeneous Agents, Monetary policy, Search and Matching, Unemployment
JEL(s): E12, E21, E24, E32, E52, J64
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11233

We build a New Keynesian business-cycle model with rich household heterogeneity. A central feature is that matching frictions render labor-market risk countercyclical and endogenous to monetary policy. Our main result is that a majority of households prefer substantial stabilization of unemployment even if this means deviations from price stability. A monetary policy focused on unemployment stabilization helps "Main Street" by providing consumption insurance. It hurts "Wall Street" by reducing precautionary saving and, thus, asset prices. On the aggregate level, household heterogeneity changes the trans mission of monetary policy to consumption, but hardly to GDP. Central to this result is allowing for self-insurance and aggregate investment.