We present a model where wealth effects generated by government bonds weaken the transmission of changes in the policy rate to output. In the U.S., when government debt is one standard deviation above its mean, the response of industrial production and unemployment to an expansionary monetary shock is reduced by 0.5pp and 0.075pp, respectively, out to a three-year horizon.

I provide new evidence that monetary policy plays a significant role in driving persistent wealth inequality in the United States. Using local projections with the Distributional Financial Accounts and high-frequency identification, I find that contractionary monetary policy disproportionately reduces the net worth of the bottom 50% of households by wealth.