Transmission of Monetary Policy with Heterogeneity in Household Portfolios

This paper assesses the importance of heterogeneity in household portfolios for the transmission of monetary policy in a New Keyne- sian business cycle model with uninsurable income risk and assets with different liquidity. In this environment, monetary transmis- sion works through investment, but redistribution lowers the elas- ticity of investment via two channels: 1) heterogeneity in marginal propensities to invest, 2) time variation in the liquidity premium. Monetary contractions redistribute to wealthy households who have high propensities to invest and a low marginal value of liquidity, thereby stabilizing investment. I provide empirical evidence for counter-cyclical liquidity premia and heterogeneity in household portfolio responses.