Monetary Policy Transmission through the Consumption-Wealth Channel

Asset market values react to economic news and policychanges, and consumers react to changes in asset marketvalues. The consumption-wealth channel of monetary policyspells out this mechanism: changes in monetary policy affectasset values, which in turn affect consumer spending onnondurable goods and services.This paper attempts to quantify these linked effects. Aftersketching the evolution of research on the wealth channel, weturn to evidence of its size from a number of large-scaleeconometric models. We then estimate a small, structuralvector autoregression (VAR) under some identifyingassumptions to provide our preferred estimates of the wealthchannel. We find that evidence of an important wealth channelfor monetary policy is scant. However, there is some role for aconsumption-wealth channel in the large-scale models—withconsiderable variation as to its size. Finally, the structural VARframework is found to show little or no sign of aconsumption-wealth channel...