Monetary Policy and the Redistribution Channel

This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Using consumer theory, I show that redistribution has aggregate effects whenever marginal propensities to consume (MPCs) covary, across households, with balance-sheet exposures to aggregate shocks. Unexpected inflation gives rise to a Fisher channel and real interest rate shocks to an interest rate exposure channel; both channels are likely to contribute to the expansionary effects of accommodative monetary policy. Indeed, using a sufficient statistic approach, I find that redistribution could be the dominant reason why aggregate consumer spending reacts to transitory changes in the real interest rate, provided households' elasticities of intertemporal substitution are reasonably small (0.3 or less in the United States). I then build and calibrate a general equilibrium model with heterogeneity in MPCs, and I evaluate how the redistribution channel alters the economy's response to shocks. When household assets and liabilities have short effective maturities, the interest rate exposure channel raises the elasticity of aggregate demand to real interest rates, which dampens fluctuations in the natural rate of interest in response to exogenous shocks and amplifies the real effects of monetary policy shocks. The model predicts that if U.S. mortgages all had adjustable rates---as they do in the U.K.---the effect of interest-rate changes on consumer spending would more than double. In addition, this effect would be asymmetric, with rate increases reducing spending by more than cuts would increase it.