Inequality, Expenditure Composition, and the Transmission of Monetary Policy

Category: Macro Seminar
When: 18 June 2024
, 14:15
 - 15:30
Where: HoF E.01/Deutsche Bank
Speaker: Federica Romei (Oxford University)

Title: Inequality, Expenditure Composition, and the Transmission of Monetary Policy (joint with Lukas Boehnert, Sergio de Ferra, and Kurt Mitman)

Abstract: We argue that the  composition  of expenditure between tradable and non-tradable goods and services affects the  transmission of monetary policy. We document at the micro level that within Eurozone countries, richer households allocate a greater share of their consumption basket to non-tradable goods.  At the aggregate level, we show that non-tradables account for a larger share of total consumption in countries with higher income inequality. Finally, we show that output responses to identified monetary policy shocks are larger for economies with lower non-tradable consumption shares. We rationalize our micro and macro findings using a model of heterogeneous agents  with non-homothetic preferences that inhabit heterogeneous countries in a monetary union. The model highlights that the interaction of non-homotheticity in preferences and market incompleteness is crucial to rationalize the empirical results.