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

This paper explores the heterogeneous effects of monetary policy on the consumption of workers and retirees. Using U.S. household-level data, we first show that the consumption of retirees responds less sensitively to monetary policy shocks than that of workers, and that the difference between these two groups’ interest incomes is one of the main sources of this heterogeneity. We then extend Gertler's (1999) life-cycle model by adding sticky prices and monetary policy to study the mechanism of the differential effects of monetary policy shocks on the consumption of workers and retirees. 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 in retirees’ total income compared to that of workers plays a key role in generating these results.