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Preference heterogeneity and optimal monetary policy

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  • Uras, Burak R.
  • van Buggenum, Hugo

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.

Suggested Citation

  • Uras, Burak R. & van Buggenum, Hugo, 2022. "Preference heterogeneity and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:dyncon:v:134:y:2022:i:c:s0165188921002244
    DOI: 10.1016/j.jedc.2021.104289
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    1. van Buggenum, Hugo, 2023. "Coexistence of money and interest-bearing bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).

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    More about this item

    Keywords

    Heterogeneous consumption preferences; Optimal policy; Zero lower bound; Negative interest rates;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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