Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy

43 Pages Posted: 31 May 2016

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

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-05

Abstract

We build a New Keynesian business-cycle model with rich household heterogeneity. A central feature is that matching frictions render labor-market risk countercyclical and endogenous to monetary policy. Our main result is that a majority of households prefer substantial stabilization of unemployment even if this means deviations from price stability. A monetary policy focused on unemployment stabilization helps "Main Street" by providing consumption insurance. It hurts "Wall Street" by reducing precautionary saving and, thus, asset prices. On the aggregate level, household heterogeneity changes the transmission of monetary policy to consumption, but hardly to GDP. Central to this result is allowing for self-insurance and aggregate investment.

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

JEL Classification: E12, E21, E24, E32, E52, J64

Suggested Citation

Gornemann, Nils and Kuester, Keith and Nakajima, Makoto, Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy (2016-05). FRB International Finance Discussion Paper No. 1167. Available at SSRN: https://ssrn.com/abstract=2786052 or http://dx.doi.org/10.17016/IFDP.2016.1167

Nils Gornemann (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
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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