The effects of monetary policy on consumption : workers vs. retirees

English Abstract: This paper explores the heterogeneous effects of monetary policy on consumption between workers and retirees. Using household-level data from the U.S., Italy, Japan and Korea, we first show that the consumption of retirees responds less sensitively to monetary policy shocks than that of workers, and that the different weight of interest income in the total income caused by the difference in financial asset holdings between these two groups is one of the main sources of this heterogeneity. We then extend a life-cycle model a la Gertler (1999) by adding sticky prices and monetary policy in order to study the mechanism of the differential effects on consumption of workers and retirees of monetary policy shocks. Consistent with the empirical evidence, the simulation results of the model show that the consumption of retirees is less sensitive to monetary policy shocks than that of workers, and that the larger weight of interest income for retirees compared to that of workers plays a key role in generating these results. The results of this paper imply that population aging can weaken the effectiveness of monetary policy