Consumption and Portfolio Rebalancing Response of Households to Monetary Policy: Evidence of the HANK Channel

59 Pages Posted: 22 May 2020

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Yeow Hwee Chua

National University of Singapore (NUS), Department of Economics

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Changcheng Song

Singapore Management University

Date Written: April 18, 2020

Abstract

This paper tests one specific monetary transmission mechanism through households: portfolio rebalancing. We use a unique panel dataset of household’s credit and debit card spending, ATM withdrawals, financial investments into risky assets such as mutual funds and equities, as well as bank deposits from a leading bank in India to study the impact of the monetary policy pass-through for term depositors. The difference-in-differences estimators show that when interest rate falls, households increase consumption by 2,095 rupees (30 USD) and risky investments by 20,728 rupees (300 USD) after the expiry of term deposits. The increase in risky investment is about 10 times as much as the increase in consumption, suggesting that savers rebalance their portfolio and “reach for yield” when interest rate falls, shifting from safe assets (bank deposits) to more risky assets (mutual funds and equities). We estimate the interest elasticity of consumption to be -1.02 and interest elasticity of risky investments to be -19.5. Furthermore, we find that the effects on consumption and risky investment are larger for households holding term deposits without automatic renewal feature. The consumption effect is larger for those with less liquid wealth and the portfolio rebalancing effect on risky investment is larger for those with more liquid wealth. These results highlight how the heterogeneity in contract design and household wealth affects the monetary policy pass-through.

Keywords: Monetary Policy, HANK model, Consumption, Portfolio Rebalancing, Household Finance, Reach for Yield

JEL Classification: D12, D14, D91, E21, E22, E52, G21

Suggested Citation

Agarwal, Sumit and Chua, Yeow Hwee and Ghosh, Pulak and Song, Changcheng, Consumption and Portfolio Rebalancing Response of Households to Monetary Policy: Evidence of the HANK Channel (April 18, 2020). Available at SSRN: https://ssrn.com/abstract=3585541 or http://dx.doi.org/10.2139/ssrn.3585541

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Yeow Hwee Chua (Contact Author)

National University of Singapore (NUS), Department of Economics ( email )

Singapore
Singapore

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Changcheng Song

Singapore Management University ( email )

50 Stamford Road
Singapore
Singapore
+6568289610 (Phone)

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