Monetary Policy over the Life Cycle

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

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Abstract: A tighter monetary policy is generally associated with higher real interest rates on deposits and loans, weaker performance of equities and real estate, and slower growth in employment and wages. How does a household’s exposure to monetary policy vary with its age? The size and composition of both household income and asset portfolios exhibit large variation over the lifecycle in Japanese data. We formulate an overlapping-generations model that reproduces these observations and use it to analyze how household responses to monetary policy shocks vary over the lifecycle. Both the signs and the magnitudes of the responses of a household's net worth, disposable income, and consumption depend on its age.

JEL classification: E52, E62, G51, D15

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

The authors wish to particularly thank Adrien Auclert and Felix Wellschmied for their detailed comments. They also thank Jordi Galí, Carlos Garriga, Charles Horioka, Sagiri Kitao, and seminar participants at the Bank of Japan and the Federal Reserve Bank of Atlanta 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.

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