nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒12‒09
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Risk, Asset Pricing and Monetary Policy Transmission in Europe: Evidence from a Threshold-VAR approach By Joerg Schmidt
  2. A Re-Evaluation of the Choice of an Inflation Target in the Wake of the Global Financial Crisis By Richard T. Froyen; Alfred V. Guender
  3. Does Central Bank Communication Signal Future Monetary Policy? The Case of the ECB By Hamza Bennani; Nicolas Fanta; Pavel Gertler; Roman Horvath
  4. Real and Nominal Effects of Monetary Shocks under Time-Varying Disagreement By Vania Esady
  5. The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets By Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
  6. Quantitative easing and exuberance in stock markets: Evidence from the euro area By Tom Hudepohl; Ryan van Lamoen; Nander de Vette
  7. A Partial Equilibrium Analysis of Current US Monetary Policy with a Prediction By Middleton, Elliott III
  8. The Czech Exchange Rate Floor: Depreciation without Inflation? By Jaromír Baxa; Tomáš Šestořád
  9. Monetary Unions and National Welfare By Cem Gorgun
  10. Inflation Targeting Flexibility: The CNB's Reaction Function under Scrutiny By Jan Filacek; Ivan Sutoris
  11. Global Liquidity and Impairment of Local Monetary Policy By Salih Fendo?lu; Eda Gül?en; José-Luis Peydró
  12. Redeemable Platform Currencies By Yang You; Kenneth S. Rogoff
  13. Long-term business relationships, bargaining and monetary policy By Mirko Abbritti; Asier Aguilera-Bravo; TommasoTrani
  14. Journal of the History of Economic Thought Preprints - Limits to Arbitrage and Interest Rates: A Debate Between Keynes, Hawtrey and Hicks By BRILLANT, Lucy
  15. Journal of the History of Economic Thought Preprints - Hawtrey, Austerity, and the "Treasury View," 1918-25 By mattei, clara
  16. Prolonged Low Interest Rates and Banking Stability By Kosuke Aoki; Ko Munakata; Nao Sudo
  18. Global liquidity and impairment of local monetary policy By Salih Fendoğlu; Eda Gülşen; José-Luis Peydró
  19. Market Participants’ Forecasts of Financial Variables – Can Survey Data Outperform the Random Walk? By Kladivko, Kamil; Österholm, Pär
  20. Spread the Word: International Spillovers from Central Bank Communication By Hanna Armelius; Christoph Bertsch; Isaiah Hull; Xin Zhang
  21. Taming the gobal financial cycle: Central banks and the sterilization of capital flows in the first era of globalization By Bazot, Guillaume; Monnet, Eric; Morys, Matthias
  22. The global financial cycle and us monetary policy in an interconnected world By Stéphane Dées; Alessandro Galesi
  23. Household Income, Portfolio Choice and Heterogeneous Consumption Responses to Monetary Policy Shocks By Fumitaka Nakamura

  1. By: Joerg Schmidt (Justus-Liebig-University Giessen)
    Abstract: This paper investigates in how far monetary policy shocks impact European asset markets, conditional on different risk states. It focuses on four different asset classes: equity of industrial firms, equity of banks, high-grade corporate bonds, and high-yielding corporate bonds. We distinguish between macroeconomic risk, political risk, and financial risk. In a first step, we separately extract three factors via principal component analysis from a set of candidate variables that are assumed to be driven by these latent types of risk. Next, these factors augment a threshold-VAR model that contains assets and a short-rate. Our model is estimated with Bayesian techniques and identified recursively. We illustrate that during periods of severe crisis, different risk regimes coincide. This impedes a clear delimitation among these three types of risk. Further on, impulse responses show that we indeed see state-dependency in the reaction of asset prices to monetary policy shocks. AA-rated corporate bond yields only show minor state-dependency if we distinguish between states of high and macroeconomic or financial risk, but show very pronounced state-dependency for political risk. Their sensitivity to monetary policy shocks is highest if political risk is . Non-investment-grade corporate bond yields as well as equity of industrial firms face the strongest state-dependency when we differentiate between macroeconomic or financial risk. If these risks are high, junk bond yields are very sensitive to monetary policy shocks while the opposite holds for equity of industrial corporations. Surprisingly, financial equity in general reacts positively or insignificant to hikes in short-rates. The positive reaction is most pronounced for states of high financial risk. As a consequence, monetary policy transmission via distinct asset markets highly depends on the degree of these different kinds of risk inherent in European asset markets. This also has strong implications for investors: they have to be aware of this varying degree of sensitivity of asset prices to changes in policy rates as they highly depend on the respective prevailing risk-regime.
    Keywords: state-dependency, asset pricing, monetary policy
    JEL: E44 G12 C11
    Date: 2019
  2. By: Richard T. Froyen; Alfred V. Guender (University of Canterbury)
    Abstract: Through an appropriate choice of inflation objective – a real-exchange-rate-adjusted (REX) inflation target - the central bank can limit fluctuations in real economic activity which have become a cause of great concern in recent years in many small open economies. REX inflation targeting dominates CPI targeting from the standpoint of output gap stabilization. CPI inflation targeting dominates REX inflation targeting from the standpoint of stabilizing inflation, nominal interest rates and real exchange rates. These results help inform ongoing discussions of possible alternatives for the existing flexible inflation targeting framework.
    Keywords: CPI, REX, Domestic Inflation Targets, Broad vs. Narrow Mandate
    JEL: E3 E5 F3
    Date: 2019–11–01
  3. By: Hamza Bennani (Universite Paris Nanterre, 200 Avenue de la République, 92000 Nanterre, France); Nicolas Fanta (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Pavel Gertler (National Bank of Slovakia, Imricha Karvasa 1, 813 25 Bratislava, Slovak Republic); Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: We examine the European Central Bank's ad-hoc communication and explore how it informs future monetary policy decisions. Using the rich dataset of the inter-meeting verbal communication among the members of the European Central Bank's Governing Council between 2008 and 2014, we construct a measure of communication assessing its inclination towards easing, tightening or maintaining the monetary policy stance. We find that this measure provides useful additional information about future monetary policy decisions, even when we control for market-based interest rate expectations and lagged decisions. Our results also suggest that, in particular, communication shortly before monetary policy meetings, related to unconventional measures and/or by the ECB President explain the future ECB rate changes well. Overall, these results point to the importance of transparency in understanding the future course of monetary policy.
    Keywords: Central bank communication, ECB, monetary policy
    JEL: E52 E58
    Date: 2019–05
  4. By: Vania Esady
    Abstract: This paper investigates the heterogeneity of monetary policy transmission under time-varying disagreement regimes using a threshold VAR. Empirically, I establish that during times of high disagreement, prices respond more sluggishly in response to monetary shocks. These stickier prices cause a flatter Phillips curve, leading to the empirical result that monetary policy has stronger real (output) effects in high disagreement periods. I develop a tractable theoretical model that show rationally inattentive price-setters produce this result. The model also links disagreement and uncertainty – two fundamentally different concepts, and bridges the results of this paper to the literature on state-dependent monetary transmission. The main result highlights a role for improved central bank communications that reduce disagreement among economic agents, which lessens output falls when implementing disinflationary monetary policies.
    Keywords: time-varying disagreement, monetary policy, threshold VAR, rational inattention
    JEL: E32 E52 E58 D83
    Date: 2019
  5. By: Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks’ capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
    Keywords: U.S. bank lending, stress tests, emerging markets, monetary policy spillovers
    JEL: E44 F31 G15 G21 G23
    Date: 2019
  6. By: Tom Hudepohl; Ryan van Lamoen; Nander de Vette
    Abstract: In response to a prolonged period of low inflation, the European Central Bank (ECB) introduced Quantitative Easing (QE) in an attempt to steer inflation to its target of below, but close to, 2% in the medium term. This paper examines whether QE contributes to exuberance in euro area stock markets by using recent advances in bubble detection techniques (the GSADF-test). We do so by linking price developments in 10 euro area stock markets to a series of country specific macro fundamentals and QE. The results indicate that periods of QE coincide with exuberant investor behaviour, even after controlling for improving macro fundamentals.
    Keywords: exuberance; asset price bubbles; unconventional monetary policy; quantitative easing
    JEL: G12 G15 E52 E58
    Date: 2019–12
  7. By: Middleton, Elliott III
    Abstract: A partial equilibrium analysis of US credit markets reveals that the Federal Reserve System’s current mechanism for raising short-term interest rates has placed the US short-term markets in a position that is far from apparent equilibria achieved over the postwar period.
    Date: 2018–11–16
  8. By: Jaromír Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; Academy of Sciences of the Czech Republic, Institute of Information Theory and Automation, Pod Vodárenskou věží 4, 182 08, Prague, Czech Republic); Tomáš Šestořád (Academy of Sciences of the Czech Republic, Institute of Information Theory and Automation, Pod Vodárenskou věží 4, 182 08, Prague, Czech Republic; Czech National Bank, Macroeconomic Forecasting Division, Na Příkopě 28, 115 03 Prague 1, Czech Republic)
    Abstract: After the introduction of an exchange rate commitment and an immediate 7% depreciation of the Czech koruna of in 2013, output growth resumed but inflation remained low. Consequently, the Czech National Bank did not return policy to normal for more than three years. Using a time-varying parameter VAR model with stochastic volatility, we show that this was not surprising. The exchange rate pass-through to prices had been rather low and gradually decreasing since the early 2000s, suggesting limited potential effects of the exchange rate commitment on inflation. On the other hand, the pass-through to output growth increased. These results hold even when the period of the exchange rate floor and the zero lower bound is excluded from the sample, and they are robust to other sensitivity checks. Our results are consistent either with a flattened Phillips curve, or rising quality of the Czech exports and participation in global value chains, or a small effect of the exchange rate commitment on inflation expectations when not paired with temporary price-level targeting. Moreover, we highlight the usefulness of models accounting for time variation of parameters for policy analysis.
    Keywords: Exchange rate commitment, exchange rate pass-through, time-varying parameters, VAR, zero lower bound
    JEL: C32 E52 F41
    Date: 2019–05
  9. By: Cem Gorgun (Koc University)
    Abstract: This paper studies monetary regime choice between monetary union and flexible exchange rate regime in a large open economy framework. The classical approach emphasizes that monetary unions are inherently costly because a single interest rate cannot respond effectively to different shocks of members of the union. Therefore, it is argued that countries with similar shocks should establish a monetary union so that the cost of one-size-fits-all monetary policy is minimized. This study reveals that when there are inefficient shocks (namely those which distort the economy asymmetrically and break the 'divine coincidence') and countries are large, the classical approach fails. In that case, monetary regime choice should depend on relative variation (mean preserving spread) of inefficient shocks rather than proximity of shocks. A union implicitly imposes cooperation in monetary policy between its members. This cooperation improves response to foreign inefficient shocks while it worsens responses to domestic inefficient shocks slightly less in terms of domestic welfare. Therefore, a country chooses monetary union over flexible exchange rate regime if variation of foreign shocks is close to or larger than variation of domestic shocks. That is on the condition that losing exchange rate flexibility is not costly or has a small cost. In this way, the domestic country 'ties the hand of the foreign country' and prevents foreign monetary policy actions which hurt domestic welfare. Both countries benefit from cooperation provided by the union, if variances (spreads) of domestic and foreign shocks are close enough. Then, a monetary union becomes Pareto Improvement. How close variances should be so that monetary union is welfare increasing or Pareto Improvement, and welfare loss or gain of losing exchange rate flexibility are contingent upon price rigidity and trade elasticity.
    Keywords: monetary unions, fl exible exchange rate, monetary policy, national welfare.
    JEL: E52 E58 F33 F41 F42
    Date: 2019–11
  10. By: Jan Filacek; Ivan Sutoris
    Abstract: This note deals with the issue of inflation targeting flexibility from the perspective of the Czech National Bank and other relevant central banks. We discuss possible ways of increasing the flexibility of the CNB's monetary policy, namely narrowing the targeted and communicated measure of inflation, prolonging the policy horizon, lowering the aggressivity of the rule to deviations of expected inflation from the target, increasing the smoothing of interest rates and responding to real economic developments. Our simulations show that these adjustments in the CNB's reaction function would slightly improve the stability of real output, while at the same time leading to large costs in terms of less stable and less anchored inflation.
    Keywords: Inflation targeting flexibility, monetary policy rules, optimal reaction function
    JEL: C32 E37 E47
    Date: 2019–11
  11. By: Salih Fendo?lu; Eda Gül?en; José-Luis Peydró
    Abstract: We show that global liquidity limits the effectiveness of local monetary policy on credit markets. The mechanism is via a bank carry trade in international markets when local monetary policy tightens. For identification, we exploit global (VIX, U.S. monetary policy) shocks and loan-level data —the credit and international interbank registers— from a large emerging market, Turkey. Softer global liquidity conditions attenuate the pass-through of local monetary policy tightening on loan rates, especially for banks with more access to international wholesale markets. Effects are also important for other credit margins and for risk-taking, e.g. riskier borrowers in FX loans or defaults.
    Keywords: global financial cycle, monetary policy, emerging markets, banks, carry trade
    JEL: G01 G15 G21 G28 F30
    Date: 2019–12
  12. By: Yang You; Kenneth S. Rogoff
    Abstract: Can massive online retailers such as Amazon and Alibaba issue digital tokens that potentially compete with bank debit accounts? We explore whether a large platform’s ability to guarantee value and liquidity by issuing prototype digital tokens for in-platform purchases constitutes a significant advantage that could potentially be leveraged into wider use. Our central finding is that unless introducing tradability creates a significant convenience yield, platforms can potentially earn higher revenues by making tokens non-tradable. The analysis suggests that if platforms have any comparative advantage in issuing tradable tokens, it comes from other factors.
    JEL: E42 G23 L51
    Date: 2019–11
  13. By: Mirko Abbritti (University of Navarra); Asier Aguilera-Bravo (Public University of Navarra and INARBE); TommasoTrani (University of Navarra)
    Abstract: A growing empirical literature documents the importance of long-term relationships and bargaining for price rigidity and firms' dynamics. This paper introduces long-term business-to-business (B2B) relationships and price bargaining into a standard monetary DSGE model. The model is based on two assumptions: first, both wholesale and retail producers need to spend resources to form new business relationships. Second, once a B2B relationship is formed, the price is set in a bilateral bargaining between firms. The model provides a rigorous framework to study the effect of long-term business relationships and bargaining on monetary policy and business cycle dynamics. It shows that, for a standard calibration of the product market, these relationships reduce both the allocative role of intermediate prices and the real effects of monetary policy shocks. We also find that the model does a good job in replicating the second moments and cross-correlations of the data, and that it improves over the benchmark New Keynesian model in explaining some of them.
    Keywords: Monetary Policy, PriceBargaining, ProductMarketSearch, B2B
    JEL: E52 E3 D4 L11
    Date: 2019–10–28
  14. By: BRILLANT, Lucy
    Abstract: This paper deals with a debate between Hawtrey, Hicks and Keynes concerning the capacity of the central bank to influence the short-term and the long-term rates of interest. Both Hawtrey and Keynes considered the central bank’s ability to influence short-term rates of interest. However, they do not put the same emphasis on the study of the long-term rates of interest. According to Keynes, long-term rates are influenced by future expected short-term rates (1930, 1936), whereas for Hawtrey (1932, 1937, 1938), long-term rates are more dependent on the business cycle. Short-term rates do not have much effect on long-term rates according to Hawtrey. In 1939, Hicks enters the controversy, giving credit to both Hawtrey’s and Keynes’s theories, and also introducing limits to the operations of arbitrage. He thus presented a nuanced view.
    Date: 2018–04–11
  15. By: mattei, clara
    Abstract: R. G. Hawtrey was not a man of the backwaters. Through the parallel study of Treasury files and Hawtrey's scholarly publications, this work reveals his direct influence upon the most commanding minds of the Treasury and the Bank of England, the two institutions that, after WWI, shared primary responsibility over the British austerity agenda. After the war, Hawtrey advocated drastic budgetary and monetary rigor in the name of price stabilization. From 1922, Hawtrey admitted the need to decrease the bank rate; yet he remained an adamant supporter of the Gold Standard, insisting on its maintenance even if it required further monetary revaluation. Hawtrey's policy prescriptions stemmed directly from his economic model. The "crowding out argument," the centrality of credit and of savings, together with the operational priority of technocratic institutions, were essential theoretical underpinnings of Hawtrey's agenda: implementing the so-called "Treasury view."
    Date: 2018–07–13
  16. By: Kosuke Aoki (Professor, University of Tokyo (E-mail:; Ko Munakata (Associate Director, Research and Statistics Department, Bank of Japan (E-mail:; Nao Sudo (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Banks in developed countries share a common concern that prolonged low nominal interest rates may pose a threat to their business, as the level of nominal interest rates is often positively correlated with bank profits in the data. It is not well understood, however, how low nominal interest rates impact bank profits and what they imply for banking stability. To address these issues, this study theoretically explores how the level of nominal interest rates affects bank profits and banking stability in the long run by extending a model of bank runs constructed by Gertler and Kiyotaki (American Economic Review, 2015). The model, calibrated to Japan and other developed countries, makes three predictions: (1) low interest rates do indeed reduce bank profits by compressing the deposit spread; (2) due to the presence of the effective lower bound of the policy rate and a slow recovery of bank net worth after a run, low interest rates bring the economy closer to a state where a bank run equilibrium can exist; (3) although there are quantitative differences across countries, a decline in nominal interest rates does not necessarily bring the economy to a state with a bank run equilibrium on its own, except for in severe cases where the TFP growth rate or the target inflation rate falls below zero.
    Keywords: Prolonged low interest rates, Bank profits, Banking stability
    JEL: E20 J11
    Date: 2019–11
  17. By: Sutch, Richard
    Abstract: John Maynard Keynes’s analysis of the Great Depression has strong parallels to recent theorizing about the post-2008 Great Recession. There are also remarkable similarities between the two historical episodes: the collapse of demand for new fixed investment, the role of the zero-lower-bound liquidity trap in hampering conventional monetary policy, the multi-year period of near-zero short-term rates, and the protracted period of subnormal prosperity. A major difference between then and now that monetary authorities in the recent situation actively pursued an unconventional policy with massive purchases of long-term securities. Keynes couldn’t convince authorities of his era to pursue such a plan, but it was precisely the monetary policy he advocated for a depressed economy stuck at the zero lower bound of nominal interest rates.
    Date: 2018–03–13
  18. By: Salih Fendoğlu; Eda Gülşen; José-Luis Peydró
    Abstract: We show that global liquidity limits the effectiveness of local monetary policy on credit markets. The mechanism is via a bank carry trade in international markets when local monetary policy tightens. For identification, we exploit global (VIX, U.S. monetary policy) shocks and loan-level data —the credit and international interbank registers— from a large emerging market, Turkey. Softer global liquidity conditions attenuate the pass-through of local monetary policy tightening on loan rates, especially for banks with more access to international wholesale markets. Effects are also important for other credit margins and for risk-taking, e.g. riskier borrowers in FX loans or defaults.
    Keywords: Global financial cycle; monetary policy; emerging markets; banks; carry trade
    JEL: G01 G15 G21 G28 F30
  19. By: Kladivko, Kamil (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: In this paper, we evaluate the forecasting precision of survey expectations of the four financial variables in the Prospera survey commissioned by Sveriges Riksbank – one of Sweden’s most important economic surveys. Our analysis shows that the market participants in the survey are able to significantly outperform the random walk for only one horizon and variable, namely the three-month horizon for the repo rate. At the longest horizon for the repo rate, and at all horizons for the five-year government bond yield, the random walk signif-icantly outperforms the market participants. For the exchange-rate data studied – SEK/USD and SEK/EUR – no significant differences in forecasting precision can be established. It accordingly seems that while the Prospera survey might be informative regarding the market participants’ expectations, it does not carry much information about the actual future developments of the exchange rates and interest rates covered by the survey.
    Keywords: Out-of-sample forecasts; Exchange rates; Interest rates
    JEL: E47 G17
    Date: 2019–11–27
  20. By: Hanna Armelius; Christoph Bertsch; Isaiah Hull; Xin Zhang
    Abstract: We construct a novel text dataset to measure the sentiment component of communications for 23 central banks over the 2002-2017 period. Our analysis yields three results. First, comovement in sentiment across central banks is not reducible to trade or financial flow exposures. Second, sentiment shocks generate cross-country spillovers in sentiment, policy rates, and macroeconomic variables; and the Fed appears to be a uniquely influential generator of such spillovers, even among prominent central banks. And third, geographic distance is a robust and economically significant determinant of comovement in central bank sentiment, while shared language and colonial ties have weaker predictive power.
    Keywords: communication, monetary policy, international policy transmission
    JEL: E52 E58 F42
    Date: 2019–12
  21. By: Bazot, Guillaume; Monnet, Eric; Morys, Matthias
    Abstract: Are central banks able to isolate their domestic economy by offsetting the effects of foreign capital flows? We provide an answer for the First Age of Globalization based on an exceptionally detailed and standardized database of monthly balance sheets of all central banks in the world (i.e. 21) over 1891-1913. Investigating the impact of a global interest rate shock on the exchange-rate, the interest rate and the central bank balance sheet, we find that not a single country played by the 'rules of the game.' Core countries fully sterilized capital flows, while peripheral countries also relied on convertibility restrictions to avoid reserve losses. In line with the predictions of the trilemma, the exchange rate absorbed the shock fully in countries off the gold standard (floating exchange rate): the central bank's ba - lance sheet and interest rate were not affected. In contrast, in the United States, a gold standard country without a central bank, the reaction of the money mar - ket rate was three times stronger than that of interest rates in countries with a central bank. Central banks' balance sheets stood as a buffer between domestic economy and global financial markets.
    JEL: N10 N20 E42 E50 F30 F44
    Date: 2019
  22. By: Stéphane Dées (Banque de France and University of Bordeaux); Alessandro Galesi (Banco de España)
    Abstract: We assess the international spillovers of US monetary policy with a large-scale global VAR which models the world economy as a network of interdependent countries. An expansionary US monetary policy shock contributes to the emergence of a Global Financial Cycle, which boosts macroeconomic activity worldwide. We also find that economies with floating exchange rate regimes are not fully insulated from US monetary policy shocks and, even though they appear to be relatively less affected by the shocks, the differences in responses across exchange rate regimes are not statistically significant. The role of US monetary policy in driving these macrofinancial spillovers gets even reinforced by the complex network of interactions across countries, to the extent that network effects roughly double the direct impacts of US monetary policy surprises on international equity prices, capital flows, and global growth. This amplification increases as countries get more globally integrated over time, suggesting that the evolving network is an important driver for the increasing role of US monetary policy in shaping the Global Financial Cycle.
    Keywords: trilemma, Global Financial Cycle, monetary policy spillovers, network effects
    JEL: C32 E52 F40
    Date: 2019–12
  23. By: Fumitaka Nakamura (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In order to analyze the transmission mechanism of monetary policy, a recent body of literature combines nominal rigidities with heterogeneous agent models. The key property of these models is that the income level of agents is heterogeneous. This paper quantifies the roles played by income level heterogeneity in the response of consumption to monetary policy shocks using U.S. household data. We show empirically that the response of consumption to expansionary monetary policy shocks is larger for high income households than low income households. This result cannot be explained by standard Aiyagari-Bewley-Huggett type heterogeneous agent models, where low income households have a higher marginal propensity to consume due to borrowing constraints. Empirical facts related to household characteristics suggest two potential channels: the presence of illiquid assets and heterogeneity in government transfers. Motivated by these empirical findings, we develop a model that incorporates illiquid assets and heterogeneity in government transfers. Simulations based on the model indicate that the presence of illiquid assets is essential for explaining the heterogeneous consumption response.
    Keywords: Consumption, Household income, Monetary policy, Liquidity
    JEL: E21 E52
    Date: 2019–11

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