Policy transmission and the consumption-wealth channel

This study investigates the effects of monetary policy on consumption through the wealth channel. Based on a structural VAR framework it is found that endogenous changes in wealth, due to an increase in the short-term interest rate, have little impact on consumption. This result means that the substantial portion of the real effect of a short-term interest rate shock to consumption is attributable to its effect through channels other than wealth. Also, the above result suggests that wealth is influenced not only by the interest rate but also by the mounting price pressures, to which the Central Bank endogenously responds.