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Monetary Policy and Reaching for Income

Author

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  • Kent Daniel
  • Lorenzo Garlappi
  • Kairong Xiao

Abstract

We study the impact of monetary policy on investors' portfolio choices and asset prices. Using data on individual portfolio holdings and on mutual fund flows, we find that a low-interest-rate monetary policy increases investors' demand for high-dividend stocks and drives up their prices. The increase in demand is more pronounced among investors who fund consumption using dividend income. To explain these empirical findings, we develop an asset pricing model in which investors have quasi-hyperbolic time preferences and use dividend income as a commitment device to curb their tendency to over-consume. When accommodative monetary policy lowers interest rates, it reduces the income stream from bonds and induces investors who want to keep a desired level of consumption to "reach for income'' by tilting their portfolio toward high-dividend stocks. Our finding suggests that low-interest-rate monetary policy may influence the risk premium of income-generating assets, lead to under-diversification of investors' portfolios, and cause redistributive effects across firms that differ in their dividend policy.

Suggested Citation

  • Kent Daniel & Lorenzo Garlappi & Kairong Xiao, 2018. "Monetary Policy and Reaching for Income," NBER Working Papers 25344, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25344
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    Cited by:

    1. Tayyaba Mukhtar & Muhammad Zeeshan Younas, 2019. "Monetary Policy Transmission Mechanism of Pakistan: Evidence from Bank Lending and Asset Price Channels," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 7(3), pages 121-139, September.
    2. Caterina Forti Grazzini & Chi Hyun Kim, 2020. "Is Monetary Policy Gender Neutral? Evidence from the Stock Market," Discussion Papers of DIW Berlin 1841, DIW Berlin, German Institute for Economic Research.

    More about this item

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G4 - Financial Economics - - Behavioral Finance

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