Preference Heterogeneity and Optimal Monetary Policy
Copyright policy )Preference Heterogeneity and Optimal Monetary Policy
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.
Journal of Economic Dynamics & Control, 134
ISSN:0165-1889
ISSN:1879-1743
- Tilburg University Netherlands
- ETH Zurich Switzerland
Zero Lower Bound, Negative Interest Rates, Optimal policy, Heterogeneous Consumption Preferences, SDG 17 - Partnerships for the Goals, Negative interest rates, Heterogeneous consumption preferences; Optimal policy; Zero lower bound; Negative interest rates, Macroeconomic theory (monetary models, models of taxation), Optimal Policy, zero lower bound, Heterogeneous consumption preferences, optimal policy, Zero lower bound, Interest rates, asset pricing, etc. (stochastic models), heterogeneous consumption preferences, negative interest rates
Zero Lower Bound, Negative Interest Rates, Optimal policy, Heterogeneous Consumption Preferences, SDG 17 - Partnerships for the Goals, Negative interest rates, Heterogeneous consumption preferences; Optimal policy; Zero lower bound; Negative interest rates, Macroeconomic theory (monetary models, models of taxation), Optimal Policy, zero lower bound, Heterogeneous consumption preferences, optimal policy, Zero lower bound, Interest rates, asset pricing, etc. (stochastic models), heterogeneous consumption preferences, negative interest rates
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