Working Paper

The Transmission of Monetary Policy under the Microscope

Abstract: We investigate the transmission of monetary policy to household consumption using detailed administrative data on the universe of households in Norway. Based on a novel series of identified monetary policy shocks, we estimate the dynamic responses of consumption, income, and saving along the liquid asset distribution of households. We find that low-liquidity but also high-liquidity households show strong responses, interest rate changes faced by borrowers and savers feed into consumption, and indirect effects of monetary policy outweigh direct effects, albeit with a delay. Overall, the results support the importance of financial frictions, cash-flow channels, and heterogeneous effects of monetary policy.

Keywords: Monetary policy; Household balance sheets; Liquidity constraints; Heterogeneous agent New Keynesian models;

JEL Classification: D31; E12; E21; E24; E32; E43; E52;

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2020-01-31

Number: 2020-03

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