Monetary Policy and the Persistent Aggregate Effects of Wealth Redistribution

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Households differ in their wealth, income and home ownership. This difference plays a large role in transmitting monetary policy. During monetary policy shocks, the current debt that households carry—nearly all nominal debt—affects how and by how much such shocks redistribute wealth between savers and borrowers.

Using a structural model that captures the economic diversity of Canadian households, we first show that the redistribution effect of monetary policy has implications for the wider economy. It also creates a trade-off for monetary policy since it creates standard, short-term benefits to output—increasing the amount of goods and services produced—but is harmful over the medium term.

Our analysis highlights that this trade-off is stronger for economies with more nominal debt and weaker under less redistributive policy frameworks such as price-level targeting (PLT). Hence economic household diversity makes PLT a more beneficial framework, strengthening its ability to stabilize inflation and output. Wealth redistribution also implies that episodes of persistently low interest rates have medium-term output costs, as observed following the 2008–09 global financial crisis.