"Essays in Household Heterogeneity and Monetary Policy"

Author: ORCID icon orcid.org/0000-0001-7842-1292
Lee, Seunghyeon, Economics - Graduate School of Arts and Sciences, University of Virginia
Leeper, Eric, AS-Economics, University of Virginia
Young, Eric, AS-Economics, University of Virginia
Lee, Jae Won, AS-Economics, University of Virginia
Murphy, Daniel, Darden School of Business, University of Virginia

My dissertation delves into household heterogeneity and monetary policy. The first essay studies optimal monetary policy in a multi-sector model with heterogeneous consumption baskets and different price indices across households. Based on micro-founded welfare, the first-best outcome is not achievable even in the absence of nominal rigidities: Optimal monetary policy targets non-zero output gaps and benefits borrowing-constrained households. Heterogeneity opens up new redistributive channels for monetary policy that operate through sectoral inflation and relative prices, and leads the central bank to target inflation rates that are weighted toward the goods consumed more intensively by the constrained households and not merely the goods with less flexible prices. Income inequality across households strengthens the results. A policy neglecting heterogeneous baskets benefits the richer households more than optimal at the cost of the poorer.

The second essay revisits classic questions in monetary economics. We show that the extent of risk-sharing among workers is a determinant of the degree of monetary non-neutrality in a multi-sector sticky-price model. Workers are employed in different sectors of the economy and, as a consequence, earn different wages. The inability of workers to insure fully against their labor income risks generates strategic complementarity in price-setting decisions of firms with respect to aggregate shocks and strategic substitutability with respect to idiosyncratic shocks. Such pricing interactions lead to slow price adjustments to monetary and other aggregate shocks, thereby producing large fluctuations of the output gap, without dampening price responses to idiosyncratic shocks. This in turn allows for large responses of sectoral and aggregate outputs to idiosyncratic productivity shocks. We illustrate our results under three stylized asset market setups: complete markets, non-contingent bond-only markets, and financial autarky.

PHD (Doctor of Philosophy)
heterogeneous households, optimal monetary policy, distributional consequences, inequality, monetary non-neutrality, real rigidities
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