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Preference Heterogeneity and Optimal Monetary Policy1

46 Pages Posted: 3 Jul 2021 Last revised: 2 Aug 2022 Publication Status: Published

See all articles by Burak Uras

Burak Uras

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Economics

Hugo van Buggenum

ETH Zürich; Tilburg University - Tilburg University School of Economics and Management

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Abstract

We study optimal policy design in a monetary model with heterogeneous preferences. In the model, financial markets are incomplete and households are heterogeneous with respect to their current consumption preferences and discount factors. The government controls the supply of money (liquid) and nominal bonds (illiquid), and households make optimal portfolio choices. We uncover that the two types of preference heterogeneity have distinct distributional consequences and different implications for the optimal monetary policy. While the heterogeneity in current consumption preferences pushes the economy towards a zero lower bound (ZLB) associated with nominal interest rates, the heterogeneity in discount factors moves the economy away from the ZLB. We characterize the optimal policy design and quantify the welfare losses associated with a binding ZLB - and thus also the potential welfare benefits of being able to implement negative interest rates.

Keywords: heterogeneous consumption preferences, optimal policy, zero lower bound, negative interest rates

Suggested Citation

Uras, Burak R. and van Buggenum, Hugo, Preference Heterogeneity and Optimal Monetary Policy1. Available at SSRN: https://ssrn.com/abstract=3879515

Burak R. Uras (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Hugo Van Buggenum

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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