Optimal Conventional and Unconventional Monetary Policy Mix

This paper examines the optimal coordination of conventional and unconventional mone-tary policy tools in an environment characterized by household heterogeneity and mortgage debt. We develop a dynamic stochastic general equilibrium (DSGE) model with three types of households—savers, borrowers, and renters—and incorporate housing investment, fixed-rate long-term mortgages, and a housing production sector. The central bank controls both the short-term interest rate and the long-term rate via the relative supply of long-term bonds. We show that household heterogeneity significantly alters the optimal policy response to macroeconomic shocks. In particular, following a cost-push shock, the optimal policy involves raising the short-term rate to combat inflation while lowering the long-term rate to alleviate financial burdens on indebted households and renters. This policy mix accelerates investment recovery but increases consumption inequality. In contrast, in a representative-agent economy, both rates are raised. Our findings highlight the importance of accounting for distributional effects in monetary policy design and suggest that yield curve control can be a valuable tool in heterogeneous economies.

Keywords: Monetary policy, household heterogeneity, yield curve control
JEL codes E40; E43; E52

Working paper no. 853