Working Paper: CEPR ID: DP10785
Authors: Vincent Sterk; Silvana Tenreyro
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 Codes: E1; E31; E32; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Different monetary interventions (OMOs vs helicopter drops) (E52) | Qualitatively different effects on economic activity (F69) |
| Redistribution from the household sector to the government (H19) | Critical role in dynamics of monetary policy effects (E52) |
| Expansionary open market operations (OMO) (E52) | Decrease in the real value of public debt (H69) |
| Expansionary open market operations (OMO) (E52) | Increase in the price level (E31) |
| Expansionary open market operations (OMO) (E52) | Increase in household consumption of durable goods (D19) |
| Increase in household consumption of durable goods (D19) | Temporary economic boom in the durables sector (E32) |
| Temporary economic boom in the durables sector (E32) | Bust in the durables sector (L68) |
| Helicopter drops (L93) | Decline in output and hours worked (J29) |