Working Paper: NBER ID: w25970
Authors: Kimberly A. Berg; Chadwick C. Curtis; Steven Lugauer; Nelson C. Mark
Abstract: We decompose the response of aggregate consumption to monetary policy shocks into contributions by households at different stages of the life cycle. This decomposition finds that older households have a higher consumption response than younger households. Amongst older households, the consumption response is also increasing in income. This, along with data on age-related net wealth, presents evidence for a wealth effect playing a role in driving the response patterns. This mechanism is studied further in a partial-equilibrium life-cycle model of consumption, saving, and labor-supply decisions. The model qualitatively explains the empirical patterns. Understanding the heterogeneity in consumption responses across age groups is important for understanding the transmission of monetary policy, especially as the U.S. population grows older.
Keywords: Monetary Policy; Consumption; Demographics; Wealth Effect
JEL Codes: E0; E21; E52; J1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher net wealth (G51) | consumption response among older households (D12) |
| monetary policy shocks (E39) | consumption response among older households (D12) |
| monetary policy shocks (E39) | consumption response among younger households (D12) |
| income (E25) | consumption response among older households (D12) |
| monetary policy shocks (E39) | differential consumption responses across age groups (D15) |
| asset portfolio composition (G11) | consumption response among older households (D12) |