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

Fumitaka Nakamura
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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)

No 19-E-19, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

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.

Keywords: Consumption; Household income; Monetary policy; Liquidity (search for similar items in EconPapers)
JEL-codes: E21 E52 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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