Distributional Effects of Monetary Policy

When the Fed aims for higher inflation, middle-aged, middle-class households, who tend to have big mortgages, benefit at the expense of wealthy retirees, who have a lot of their savings in bank accounts and bonds. Poor and young households are less affected because they are less likely to own homes and their debt burdens are low. In this model, monetary policy not only creates winners and losers but this redistribution also has effects on the real economy: Aggregate consumption declines because winners are likely to spend a smaller fraction of their incomes than losers.