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Stock Market Participation, Inequality, and Monetary Policy

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  • Davide Melcangi
  • Vincent Sterk

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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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    References listed on IDEAS

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    1. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, June.
    2. Karel Mertens & Morten O. Ravn, 2013. "The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States," American Economic Review, American Economic Association, vol. 103(4), pages 1212-1247, June.
    3. Andreas Fagereng & Martin Blomhoff Holm & Benjamin Moll & Gisle Natvik, 2019. "Saving Behavior Across the Wealth Distribution: The Importance of Capital Gains," NBER Working Papers 26588, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Maliar, Lilia & Naubert, Christopher, 2019. "TANK Models with Amplification and no Puzzles: the Magic of Output Stabilization and Capital," CEPR Discussion Papers 14159, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    monetary policy; stock investment; heterogeneity;

    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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