Wealth Distribution and Monetary Policy

Abstract

How does wealth inequality shape the transmission of monetary policy to household consumption? I quantitatively assess the contribution of different wealth groups to the response of aggregate consumption, using the joint distribution of consumption, income, and wealth in the US and a quantitative Heterogeneous Agents New Keynesian (HANK) model. I find that households at the tails of the wealth distribution account for most of the dynamics in aggregate consumption. Moreover, wealthy households in the top 10% have the largest impact on aggregate consumption. The reason is that relative to other wealth groups, households at the top of the distribution benefit the most from higher equity prices and have sizable consumption shares. Overall, the findings in this paper provide new quantitative insights on the role of the wealth distribution and household heterogeneity for the aggregate effects of macroeconomic shocks.