Abstract: This paper develops a novel framework for business-cycle analysis in the Euro-area based on the distinction between necessity and discretionary spending as well as their associated industries. We apply our approach to quantify the heterogeneous effects of monetary policy, uncovering significant new regularities. Consumer spending, employment, corporate profits, stock returns and dividend payments exhibit greater cyclicality and greater sensitivity to monetary policy in discretionary industries, while prices respond more in sectors producing necessities. Wages, however, display limited sectoral asymmetry. Discretionary industries are characterized by a substantially higher concentration of hand-to-mouth workers, particularly among lower earners. Only consumer prices in necessity sectors are a significant leading indicator for GDP, whereas only employment rates in discretionary industries help predict HICP inflation. We show that a calibrated theoretical model with spending heterogeneity and labour market heterogeneity is consistent with these findings. We use the model to revisit the design of optimal monetary policy. We find that the European Central Bank can improve welfare by responding mostly to inflation in discretionary spending; doing so mitigates the adverse effects of recessions on hand-to-mouth workers and thus stabilizes aggregate demand and headline inflation more effectively. 

Abstract:  This paper studies the interaction between capital constraints from the Supervisory Capital Assessment Program and the Federal Reserve’s quantitative easing in shaping banks' lending behavior. Using comprehensive loan-rate data, we find that stress-tested banks lower mortgage rates more-but raise consumer loan rates more-than non-stress-tested banks, highlighting a trade-off imposed by balance-sheet constraints. The effects are more pronounced for stress-tested banks that were forced to recapitalize more by the regoulators and that were ex-ante more exposed to the Fed's asset purchases. Our theoretical framework suggests that stress tested banks prioritize mortgage lending to take advantage of reduced funding costs associated with QE, which necessitates a reduction in consumer lending and higher consumer loan rates to remain within regulatory capital limits. These findings inform how regulatory constraints can influence the transmission of monetary policy across credit markets.

Abstract: I study the impact of monetary policy on wealth inequality in the US. Empirically, an exogenous monetary tightening results in a redistribution of wealth from the middle class to top wealth holders: six years after a 1% exogenous increase in the real interest rate, the wealth share of the top decile of the wealth distribution rises by 4%, while that of the 50-90% wealth holders drops by 6%. This effect is largely driven by heterogeneous capital gains across the wealth distribution. Following a 1% monetary tightening, the stock-to-house price ratio increases by up to 17.4% after 6 years, benefiting wealthy households with substantial stock and business equity holdings more than middle-class households, who primarily hold housing. A back-of-the-envelope calculation shows that the asset pricing channel is quantitatively relevant in explaining the response of wealth shares to monetary policy shocks.  A heterogeneous agent model incorporating capital, housing, and mortgage debt replicates these findings, underscoring also the amplification role of borrowing constraints tied to real estate values for the distributional impact of monetary policy through asset price dynamics.