The Redistributive Effects of Monetary Policy Daniel Andrei (UCLA) - PowerPoint PPT Presentation

The Redistributive Effects of Monetary Policy Daniel Andrei (UCLA) Bernard Herskovic (UCLA) Olivier Ledoit (U of Zurich) November 2017 The Redistributive Effects of Monetary Policy 0 / 22

Quantitative Easing: The Fed’s balance sheet The Redistributive Effects of Monetary Policy 1 / 22

Questions ◮ Monetary policy effects in the cross section? ◮ Redistributive effects? The Redistributive Effects of Monetary Policy 2 / 22

Redistributive effects of monetary policy: ◮ Monetary expansions redistribute wealth: ◮ From old to young agents (Bhattacharya, Haslag, and Martin, 2005) ◮ From altruistic to selfish agents (Palivos, 2005) ◮ From creditors to debtors (Romer and Romer, 1999) ◮ From the rich to the poor (Shi, 1999) ◮ From the poor to the rich (Erosa and Ventura, 2002) ◮ From bond investors to “arbitrageurs” (Vayanos and Vila, 2009) ◮ This paper: to agents that are “closer” to the central bank ◮ Various sources of heterogeneity: ◮ Different income sources (wages vs. profits) ◮ Different access to financial markets ◮ Different portfolios ◮ Different earnings (high vs. low-income) ◮ Different savings (borrowers vs. savers) ◮ Different preferences for specific bond maturities ◮ This paper: different “locations” The Redistributive Effects of Monetary Policy 3 / 22

Redistributive effects of monetary policy: ◮ Monetary expansions redistribute wealth: ◮ From old to young agents (Bhattacharya, Haslag, and Martin, 2005) ◮ From altruistic to selfish agents (Palivos, 2005) ◮ From creditors to debtors (Romer and Romer, 1999) ◮ From the rich to the poor (Shi, 1999) ◮ From the poor to the rich (Erosa and Ventura, 2002) ◮ From bond investors to “arbitrageurs” (Vayanos and Vila, 2009) ◮ This paper: to agents that are “closer” to the central bank ◮ Various sources of heterogeneity: ◮ Different income sources (wages vs. profits) ◮ Different access to financial markets ◮ Different portfolios ◮ Different earnings (high vs. low-income) ◮ Different savings (borrowers vs. savers) ◮ Different preferences for specific bond maturities ◮ This paper: different “locations” The Redistributive Effects of Monetary Policy 3 / 22

Redistributive effects of monetary policy: ◮ Monetary expansions redistribute wealth: ◮ From old to young agents (Bhattacharya, Haslag, and Martin, 2005) ◮ From altruistic to selfish agents (Palivos, 2005) ◮ From creditors to debtors (Romer and Romer, 1999) ◮ From the rich to the poor (Shi, 1999) ◮ From the poor to the rich (Erosa and Ventura, 2002) ◮ From bond investors to “arbitrageurs” (Vayanos and Vila, 2009) ◮ This paper: to agents that are “closer” to the central bank ◮ Various sources of heterogeneity: ◮ Different income sources (wages vs. profits) ◮ Different access to financial markets ◮ Different portfolios ◮ Different earnings (high vs. low-income) ◮ Different savings (borrowers vs. savers) ◮ Different preferences for specific bond maturities ◮ This paper: different “locations” The Redistributive Effects of Monetary Policy 3 / 22

Redistributive effects of monetary policy: ◮ Monetary expansions redistribute wealth: ◮ From old to young agents (Bhattacharya, Haslag, and Martin, 2005) ◮ From altruistic to selfish agents (Palivos, 2005) ◮ From creditors to debtors (Romer and Romer, 1999) ◮ From the rich to the poor (Shi, 1999) ◮ From the poor to the rich (Erosa and Ventura, 2002) ◮ From bond investors to “arbitrageurs” (Vayanos and Vila, 2009) ◮ This paper: to agents that are “closer” to the central bank ◮ Various sources of heterogeneity: ◮ Different income sources (wages vs. profits) ◮ Different access to financial markets ◮ Different portfolios ◮ Different earnings (high vs. low-income) ◮ Different savings (borrowers vs. savers) ◮ Different preferences for specific bond maturities ◮ This paper: different “locations” The Redistributive Effects of Monetary Policy 3 / 22

The economy is a network ◮ Topological notions of location , neighborhood , and closeness ◮ Monetary shocks start somewhere and feed through the network ◮ Goods and Asset Prices: Prices of goods and assets closest to the point where money is created increase more ◮ Redistribution: The winners are those closest to the point where money is created ◮ Related work: ◮ Williamson (2008), Ozdagli and Weber (2016) ◮ Redistributive effects of (un)conventional monetary policies: Coibion et al. (2012); Saiki and Frost (2014) ◮ (Un)conventional monetary policies and bubbles: Schwartz (2003); Detken and Smets (2004); Bordo and Landon-Lane (2013); Gal (2013) ◮ Acemoglu et al. (2012) The Redistributive Effects of Monetary Policy 4 / 22

The economy is a network ◮ Topological notions of location , neighborhood , and closeness ◮ Monetary shocks start somewhere and feed through the network ◮ Goods and Asset Prices: Prices of goods and assets closest to the point where money is created increase more ◮ Redistribution: The winners are those closest to the point where money is created ◮ Related work: ◮ Williamson (2008), Ozdagli and Weber (2016) ◮ Redistributive effects of (un)conventional monetary policies: Coibion et al. (2012); Saiki and Frost (2014) ◮ (Un)conventional monetary policies and bubbles: Schwartz (2003); Detken and Smets (2004); Bordo and Landon-Lane (2013); Gal (2013) ◮ Acemoglu et al. (2012) The Redistributive Effects of Monetary Policy 4 / 22

The economy is a network ◮ Topological notions of location , neighborhood , and closeness ◮ Monetary shocks start somewhere and feed through the network ◮ Goods and Asset Prices: Prices of goods and assets closest to the point where money is created increase more ◮ Redistribution: The winners are those closest to the point where money is created ◮ Related work: ◮ Williamson (2008), Ozdagli and Weber (2016) ◮ Redistributive effects of (un)conventional monetary policies: Coibion et al. (2012); Saiki and Frost (2014) ◮ (Un)conventional monetary policies and bubbles: Schwartz (2003); Detken and Smets (2004); Bordo and Landon-Lane (2013); Gal (2013) ◮ Acemoglu et al. (2012) The Redistributive Effects of Monetary Policy 4 / 22

Model overview ◮ N agents and N different goods ◮ Agent j : endowed with one unit of good j and M units of money ◮ Optimization � β N � m j � x ij α ij max × � N m j ; x 1 j ,..., x Nj k =1 m k i =1 N � subject to: m j + p i x ij ≤ M + p j i =1 ◮ Central Bank: injects Q into the economy and buys good 1 ( Q p 1 units) ◮ Market-clearing conditions (goods): N Q � x ij = 1 − δ i 1 ∀ i = 1 ,..., N , p 1 j =1 where δ i 1 = 1 for i = 1 and zero otherwise The Redistributive Effects of Monetary Policy 5 / 22

The notion of “Location” The Redistributive Effects of Monetary Policy 6 / 22

The notion of “Location” 1 2 N 3 N-1 n n+2 n+1 The Redistributive Effects of Monetary Policy 6 / 22

The notion of “Location” 1 2 N 3 N-1 Agents are similar (preference for money, cash endowment), but are situated in different locations and have different connections. n n+2 n+1 The Redistributive Effects of Monetary Policy 6 / 22

The notion of “Location” Endowed with quantity of money M and and one unit of good 1 1 2 N 3 N-1 Agents are similar (preference for money, cash endowment), but are situated in different locations and have different connections. n n+2 n+1 The Redistributive Effects of Monetary Policy 6 / 22

The notion of “Location” Endowed with quantity of � β N � m 1 � x α i 1 money M and and one unit max � n i 1 m 1 , x i 1 k =1 m k of good 1 i =1 1 2 N 3 N-1 Agents are similar (preference for money, cash endowment), but are situated in different locations and have different connections. n n+2 n+1 The Redistributive Effects of Monetary Policy 6 / 22

The notion of “Location” Endowed with quantity of � β N � m 1 � x α i 1 money M and and one unit max � n i 1 m 1 , x i 1 k =1 m k of good 1 i =1 1 2 N a 0 3 N-1 n n+2 n+1 The Redistributive Effects of Monetary Policy 6 / 22

The notion of “Location” Endowed with quantity of � β N � m 1 � x α i 1 money M and and one unit max � n i 1 m 1 , x i 1 k =1 m k of good 1 i =1 1 2 N a 0 a 1 a 1 3 N-1 n n+2 n+1 The Redistributive Effects of Monetary Policy 6 / 22

The notion of “Location” Endowed with quantity of � β N � m 1 � x α i 1 money M and and one unit max � n i 1 m 1 , x i 1 k =1 m k of good 1 i =1 1 2 N a 0 a 1 a 1 3 N-1 a 2 a 2 n n+2 n+1 The Redistributive Effects of Monetary Policy 6 / 22

The notion of “Location” Endowed with quantity of � β N � m 1 � x α i 1 money M and and one unit max � n i 1 m 1 , x i 1 k =1 m k of good 1 i =1 1 2 N a 0 a 1 a 1 3 N-1 a 2 a 2 a n − 1 a n − 1 n n+2 n+1 The Redistributive Effects of Monetary Policy 6 / 22

The notion of “Location” Endowed with quantity of � β N � m 1 � x α i 1 money M and and one unit max � n i 1 m 1 , x i 1 k =1 m k of good 1 i =1 1 2 N a 0 a 1 a 1 3 N-1 a 2 a 2 a n − 1 a n − 1 a n n n+2 n+1 The Redistributive Effects of Monetary Policy 6 / 22