Monetary Policy and Reaching for Income

67 Pages Posted: 11 Dec 2018 Last revised: 16 Dec 2018

See all articles by Kent D. Daniel

Kent D. Daniel

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Lorenzo Garlappi

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

Kairong Xiao

Columbia University - Columbia Business School

Date Written: December 2018

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.

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Suggested Citation

Daniel, Kent D. and Garlappi, Lorenzo and Xiao, Kairong, Monetary Policy and Reaching for Income (December 2018). NBER Working Paper No. w25344. Available at SSRN: https://ssrn.com/abstract=3298820

Kent D. Daniel (Contact Author)

Columbia Business School - Finance and Economics ( email )

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HOME PAGE: http://kentdaniel.net/

National Bureau of Economic Research (NBER)

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Lorenzo Garlappi

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

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Kairong Xiao

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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