Monetary Policy and Reaching for Income

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