What Are The Wealth Eects Of Monetary Policy

Abstract

This paper investigates empirically the relation between monetary policy and wealth using quarterly data for the U.S. and the Euro Area. I find that a monetary policy contraction leads to a substantial fall in wealth. Nevertheless, while financial wealth effects are of short duration, housing wealth e¤ects are very persistent. After a positive interest rate shock there is a flight towards assets that are less liquid and earn higher rates of return, and a strong change in the composition of portfolios. Finally, the findings suggest that the money demand function is characterized by small output elasticity and large interest elasticity. By its turn, the estimated policy rule reveals that the monetary authority pays a special attention to developments in monetary aggregates, while keeping a vigilant posture regarding financial wealth.

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