The Portfolio Balance Channel of Monetary Policy: Evidence from the U.S. Financial Accounts

37 Pages Posted: 30 Jun 2017

See all articles by David Beckworth

David Beckworth

Mercatus Center at George Mason University

Joshua R. Hendrickson

University of Mississippi; American Institute for Economic Research

Date Written: July 15, 2015

Abstract

How does monetary policy affect the balance sheet of households? This is an important question in light of the recent large scale asset purchases that have been justified on the grounds of the portfolio balance channel. Many studies have attempted to quantify the effect of these LSAPs and find evidence for the portfolio channel. Most of these studies, however, focus only on one manifestation of the portfolio channel, the change in relative yields and typically do so in the narrow context of the zero lower bound. Little is empirically known about this channel in more conventional settings. This paper attempts to fill this gap in the literature by examining the overall validity of the channel away from the zero lower bound. We do this by examining how household portfolios responded to monetary policy shocks to the monetary base and to inflation forecasts for the period 1959:Q1 – 2007:Q4. We find strong evidence that the portfolio channel is an important part of the monetary transmission mechanism.

Keywords: Portfolio Balance Channel, Vector Autoregressions, Monetary Policy Shock, Financial Accounts

JEL Classification: E52, E51, G11

Suggested Citation

Beckworth, David and Hendrickson, Joshua R., The Portfolio Balance Channel of Monetary Policy: Evidence from the U.S. Financial Accounts (July 15, 2015). Available at SSRN: https://ssrn.com/abstract=2995221 or http://dx.doi.org/10.2139/ssrn.2995221

David Beckworth (Contact Author)

Mercatus Center at George Mason University ( email )

3434 Washington Blvd. 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://macromarketbusiness.blogspot.com

Joshua R. Hendrickson

University of Mississippi ( email )

Oxford, MS 38677
United States

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

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