Preference heterogeneity and optimal monetary policy
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Date
2022-01
Publication Type
Journal Article
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yes
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Abstract
We study optimal policy design in a monetary model with heterogeneous preferences. In the model, financial markets are incomplete and households are heterogeneous with respect to their current consumption preferences and discount factors. The government controls the supply of money (liquid) and nominal bonds (illiquid), and households make optimal portfolio choices. We uncover that the two types of preference heterogeneity have distinct distributional consequences and different implications for the optimal monetary policy. While the heterogeneity in current consumption preferences pushes the economy towards a zero lower bound (ZLB) associated with nominal interest rates, the heterogeneity in discount factors moves the economy away from the ZLB. We characterize the optimal policy design and quantify the welfare losses associated with a binding ZLB - and thus also the potential welfare benefits of being able to implement negative interest rates.
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Publication status
published
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Book title
Journal / series
Volume
134
Pages / Article No.
104289
Publisher
Elsevier
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Edition / version
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Software
Geographic location
Date collected
Date created
Subject
Heterogeneous consumption preferences; Optimal policy; Zero lower bound; Negative interest rates
Organisational unit
03729 - Gersbach, Hans / Gersbach, Hans