Monetary Policy And The Redistribution Channel Analysis

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Monetary Policy and the redistribution Channel
Adrien Auclert
Summary: Monetary expansion usually creates winners and losers, and in this paper, the author indentifies three channels namely earnings heterogeneity channel, Fisher channel and unhedged interest rate exposures through which the aggregate consumer spending increases. The critical assumption that the author has maintained is MPCs of the winners are greater than the losers for the above chain of events to be valid. In this paper, the author emphasizes on the last of these channels, the unhedged interest rate exposures channels, along with two traditional channels: aggregate income and substitution, of the transmission mechanism of monetary policy to highlight the redistribution created
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Firstly, the author assumes that the winners have the higher MPCs than the losers for each change in isolations; however, given the wide heterogeneity of MPCs among the different groups of population, this does not seem very tenable assumption to make. Moreover, depending on which phase of the life cycle the household is in, the MPCs would be different. For example, very young group who has just entered the job or very old people who have retired from work will have high MPCs, nonetheless, these two groups are not same in terms of asset positions and other characteristics. So, the change in monetary policy will likely to affect these two groups differently. Secondly, the author claims that monetary policy shocks would have more than double their current effect on household nondurable consumption if the U.S. economy only had adjustable rate mortgages instead of its current mix of adjustable and fixed rate mortgages. This seems counter intuitive as the consumption of nondurables is generally less responsive to any windfall gain in income and the households for which the debt constraint is not binding, will be on Euler equation and for the household with binding debt constraint should not change too much so that the consumption of nondurable would become more than double due to any monetary policy shock. The author admits that his sufficient statistics overpredicts the increase in output that result from a sufficiently large fall. The reason for this according to the author is the differential response of borrowers at their credit limit rises and falls in income, that is, while these borrowers save an important fraction of the gains they get from low interest rates, they are forced to cut spending steeply when interests rise. This also seems an over generalization: households with binding debt constraint are less likely to

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