Monetary Policy and Reaching for Income

59 Pages Posted: 16 Aug 2018 Last revised: 17 Aug 2020

See all articles by Kent D. Daniel

Kent D. Daniel

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Kairong Xiao

Columbia University - Columbia Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 15, 2018

Abstract

Using data on individual portfolio holdings and on mutual fund flows, we find that low interest rates lead to a significantly higher demand for income-generating assets such as high-dividend stocks and high-yield bonds. We argue that this "reaching for income" phenomenon is driven by investors who follow the rule-of-thumb of "living off income." Our empirical analysis shows that this preference for current income affects both household portfolio choices and the prices of income-generating assets. In addition, we explore the implications of reaching for income for capital allocation and the effectiveness of monetary policy.

Keywords: reaching for income, monetary policy

JEL Classification: E50, G40, G11

Suggested Citation

Daniel, Kent D. and Garlappi, Lorenzo and Xiao, Kairong, Monetary Policy and Reaching for Income (April 15, 2018). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3232328 or http://dx.doi.org/10.2139/ssrn.3232328

Kent D. Daniel

Columbia University - Columbia Business School, Finance ( email )

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Kairong Xiao (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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