This paper assesses the importance of heterogeneity in household portfolios for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different liquidity. In this environment, monetary transmission works through investment, but redistribution lowers the elasticity of investment via two channels: (i) heterogeneity in marginal propensities to invest, and (ii) time variation in the liquidity premium. Monetary contractions redistribute to wealthy households who have high propensities to invest and a low marginal value of liquidity, thereby stabilizing investment. I provide empirical evidence for countercyclical liquidity premia and heterogeneity in household portfolio responses. (JEL E12, E32, E52, G11, G51)
Twin Picks: Disentangling the Determinants of Risk-Taking in Household Portfolios
