Monetary Policy with Heterogeneous Agents

49 Pages Posted: 18 Sep 2012

See all articles by Nils Gornemann

Nils Gornemann

Board of Governors of the Federal Reserve System

Keith Kuester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Makoto Nakajima

Federal Reserve Bank of Philadelphia

Date Written: September 11, 2012

Abstract

We build a New Keynesian model in which heterogeneous workers differ with regard to their employment status due to search and matching frictions in the labor market, their potential labor income, and their amount of savings. We use this laboratory to quantitatively assess who stands to win or lose from unanticipated monetary accommodation and who benefits most from systematic monetary stabilization policy. We find substantial redistribution effects of monetary policy shocks; a contractionary monetary policy shock increases income and welfare of the wealthiest 5 percent, while the remaining 95 percent experience lower income and welfare. Consequently, the negative effect of a contractionary monetary policy shock to social welfare is larger if heterogeneity is taken into account.

Keywords: Monetary Policy, Unemployment, Search and Matching, Heterogeneous Agents, General Equilibrium

JEL Classification: E10, E30, C11

Suggested Citation

Gornemann, Nils and Kuester, Keith and Nakajima, Makoto, Monetary Policy with Heterogeneous Agents (September 11, 2012). FRB of Philadelphia Working Paper No. 12-21, Available at SSRN: https://ssrn.com/abstract=2147841 or http://dx.doi.org/10.2139/ssrn.2147841

Nils Gornemann (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Keith Kuester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Makoto Nakajima

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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