The Transmission of Monetary Policy Through Redistributions and Durable Purchases

50 Pages Posted: 27 Aug 2015

See all articles by Vincent Sterk

Vincent Sterk

University College London

Silvana Tenreyro

London School of Economics (LSE)

Date Written: August 2015

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.

Keywords: durable goods, monetary policy, open market operations, redistributive effects of monetary policy, transmission mechanism

JEL Classification: E1, E31, E32, E52, E58

Suggested Citation

Sterk, Vincent and Tenreyro, Silvana, The Transmission of Monetary Policy Through Redistributions and Durable Purchases (August 2015). CEPR Discussion Paper No. DP10785, Available at SSRN: https://ssrn.com/abstract=2652155

Vincent Sterk (Contact Author)

University College London ( email )

Silvana Tenreyro

London School of Economics (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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