Martin Blomhoff Holm: Monetary Policy Transmission with Income Risk
Job talk. Martin Blomhoff Holm is a PhD Candidate in Economics at BI Norwegian Business School. He will present a paper entitled "Monetary Policy Transmission with Income Risk".
Martin Blomhoff Holm. Photo: BI
Monetary policy affects households via two channels: directly by affecting the interest rates households face on borrowings and savings, and indirectly through general equilibrium effects on wages. I show that an increase in income risk makes households' consumption less sensitive to interest rate changes, but more sensitive to wage changes. For an empirically plausible wage elasticity to monetary policy changes, the first effect dominates such that more income risk weakens monetary policy transmission. Quantitative simulations of a heterogeneous agent New-Keynesian model suggest that the increase in income risk in the United States since the 1970s has weakened monetary policy transmission to aggregate consumption by up to 30 percent.
Host: Kjetil Storesletten