Working Paper（25-006E）Monetary policy over the lifecycle

Abstract

Household net worth portfolios vary significantly over the lifecycle. Young households typically have low net worth and hold leveraged long positions in illiquid tangible assets like homes, cars and appliances. Older households, in contrast, tend to have high net worth and significant holdings of liquid assets in their portfolios. Monetary policy alters the interest rate on deposits and the spread on liquid and illiquid assets. Consequently, changes in monetary policy are likely to impact portfolio returns and investment opportunities of young and old households differently. We propose a quantitative model of monetary policy over the lifecycle that formalizes this insight. Households make endogenous portfolio choices and the age profile of their choices in our model is consistent with Japanese data. Our model has different microeconomic foundations and propagation channels of monetary policy compared to previous New Keynesian models, yet it reproduces the empirical responses of aggregate variables, and the microeconomic responses of different age groups to a tighter monetary policy. Net worth, consumption, and welfare increase, for older households but decrease for younger households, leading to higher wealth inequality. Additionally, monetary policy, by altering investment opportunities, has persistent and varied impacts on what different age groups can achieve over their remaining lives. Our results imply that aggregate consumption is a poor metric for assessing the impact of monetary policy on households because the large consumption declines of young households are offset by gains from older and more affluent households.