The Transmission of Monetary Policy through Redistributions and Durable Purchases

This paper studies a redistribution channel for the transmission of monetary policy. Us-ing a tractable OLG setting in which the government is a net debtor, we show that standard open market operations (OMO) conducted by Central Banks have signi\u85cant revaluation e¤ects that alter the level and distribution of wealth in the economy and the real interest rate. Speci\u85cally, expansionary OMO generate a negative wealth e¤ect (the private sector as a whole is a net creditor to the government), increasing householdsincentives to save for retirement and pushing down the real interest rate. This, in turn, leads to a substitution towards durables, generating a temporary boom in the durable good sector. With search and matching frictions, a form of productive investment is added to the model and the fall in interest rates causes an increase in labour demand, raising aggregate employment. The mechanism can mimic the empirical responses of key macroeconomic variables to monetary policy interventions. The model shows that di¤erent monetary interventions (e.g., OMO versus helicopter drops) can have sharply di¤erent e¤ects on activity