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More Money for Some: The Redistributive Effects of Open Market Operations

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Open market operations are among the most common instruments that central banks use to conduct monetary policy. However, there is little understanding about how these operations can unevenly affect households with different portfolio compositions and levels of wealth.

I study how monetary policy is transmitted through open market operations and what this means for different households along the distribution of wealth. In my model, heterogeneous households save using both money and government bonds while facing random liquidity needs. I show that open market operations that increase the supply of government bonds are associated with higher nominal interest rates and increased economic activity.

A higher supply of bonds improves households’ ability to insure against future liquidity needs.  It also leads to more efficient trading between households and therefore reduces inequality. Moreover, this type of operation redistributes wealth from rich to poor households and raises consumption and welfare among households with lower levels of wealth.