R. Anton Braun and Daisuke Ikeda
Working Paper 2021-20b
August 2021 (Revised August 2022)

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Abstract: A tighter monetary policy is associated with higher nominal and real interest rates on deposits and loans, weaker performance of equities, lower aggregate investment and consumption, and slower growth in employment and wages. We propose a quantitative lifecycle model that reproduces these responses and find that an asset substitution, or Tobin effect, plays a central role in understanding the responses of stock prices and aggregate investment. We use the model to analyze how a household's exposure to monetary policy varies with its age and find that monetary policy has important distributional effects. The sign, magnitude, and persistence of household consumption responses depend on age, and the pattern of these responses implies that a tighter monetary policy increases inequality in net worth and consumption.

JEL classification: E52, E62, G51, D15

Key words: monetary policy, lifecycle, portfolio choice, nominal government debt, Tobin effect


The authors wish to particularly thank Kosuke Aoki, Adrien Auclert, Marcus Hagedorn, and Felix Wellschmied for their detailed comments. They also thank Fumio Hayashi, Jordi GalĂ­, Carlos Garriga, Charles Horioka, Kosuke Aoki, Sagiri Kitao, and seminar and conference participants at the Bank of Japan, the Federal Reserve Banks of Kansas City and Atlanta, Keio University, 2022 Society for Economic Dynamics meetings and the 23rd annual Macro Conference for their helpful comments. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or the Bank of Japan. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to R. Anton Braun, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree St. NE, Atlanta, GA 30309; or Daisuke Ikeda, Bank of Japan.