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Stock Market Participation, Inequality, and Monetary Policy

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Abstract

What role does stock investment play in the transmission of monetary policy to the real economy? We study this question using a New Keynesian model with heterogeneous households. Following a monetary tightening, stock market participants rebalance their investments away from stocks, in line with empirical evidence on mutual fund flows. This response depresses aggregate investment and hence aggregate output and income, which feeds back into an even larger decline in stock investment. The strength of this channel is, however, highly sensitive to household heterogeneity. Therefore, we design the model to account endogenously for the observed population share of stockholders, their income characteristics, and their saving behavior. We find that, quantitatively, the stock investment channel of monetary policy dominates the consumption channels often emphasized in the literature, and also that it has become more powerful since the 1980s, as stock market participation increased.

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  • Davide Melcangi & Vincent Sterk, 2020. "Stock Market Participation, Inequality, and Monetary Policy," Staff Reports 932, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:88284
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    Cited by:

    1. Juan M. Morelli, 2021. "Limited Participation in Equity Markets and Business Cycles," Finance and Economics Discussion Series 2021-026, Board of Governors of the Federal Reserve System (U.S.).
    2. Sebastian Doerr & Thomas Drechsel & Donggyu Lee, 2022. "Income Inequality and Job Creation," Staff Reports 1021, Federal Reserve Bank of New York.
    3. Sebastian Doerr & Thomas Drechsel & Donggyu Lee, 2021. "Income inequality, financial intermediation, and small firms," BIS Working Papers 944, Bank for International Settlements.
    4. Rohan Kekre & Moritz Lenel, 2022. "Monetary Policy, Redistribution, and Risk Premia," Econometrica, Econometric Society, vol. 90(5), pages 2249-2282, September.
    5. Matusche, Alexander & Wacks, Johannes, 2023. "Does wealth inequality affect the transmission of monetary policy?," Journal of Macroeconomics, Elsevier, vol. 75(C).
    6. Naubert, Christopher, 2019. "Monetary Policy and Redistribution: A Look under the Hatch with TANK," CEPR Discussion Papers 14159, C.E.P.R. Discussion Papers.
    7. Hetzel, Robert, 2020. "COVID-19 and the Fed’s Monetary Policy," Working Papers 10839, George Mason University, Mercatus Center.

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    More about this item

    Keywords

    monetary policy; stock investment; heterogeneity;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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