Date of Award

2022

Document Type

Honors Thesis (Open Access)

Department

Colby College. Economics Dept.

Advisor(s)

Kathrin Ellieroth

Second Advisor

Michael Donihue

Abstract

This paper analyzes the role of the interest rate channel of monetary policy on household consumption sensitivities across the income distribution. To study this, I build a heterogenous agent model where households experience interest rate shocks as a proxy for monetary policy in addition to income shocks. I find that the poorest quintile increases consumption by about 4.5% in response to a recessionary interest rate cut, with this effect weakening for each additional quintile. When interest rate shocks differ by income group, the poorest lose about 3.6% of consumption and monetary policy’s effect on aggregate consumption weakens. When the income distribution skews more toward the upper quintiles, these effects amplify. If agents lose income in recessions, the effect of an interest rate cut is greatly dependent on whether households are subject to disparate rate policy. My results suggest that the traditional interest rate channel might be less effective at stimulating demand for high income individuals than as intended by policy makers.

Keywords

Monetary Transmission, Heterogenous Agent Model, Monetary Economics, Interest Rate Channel

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