Consumption and Portfolio Rebalancing Response of Households to Monetary Policy

62 Pages Posted: 22 May 2020 Last revised: 30 Mar 2022

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Yeow Hwee Chua

Nanyang Technological University (NTU)

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Changcheng Song

Singapore Management University

Date Written: April 18, 2020

Abstract

Using micro-level administrative data from India, we show the consumption and portfolio rebalancing response of households to changes in interest rate. Exploiting variation in the timing of expiry of term deposits, we find that when interest rate falls, households increase consumption by 6 percent and increase their fraction of wealth into risky assets by 36 percent after the expiry of term deposits. While both existing and new investors “reach for income” by investing in high dividend stocks, new investors also “reach for yield” by investing in high beta and more volatile stocks. The effects on consumption and risky investment are smaller for term depositors with automatic renewal. Households with more liquid wealth have a smaller consumption effect but a larger portfolio rebalancing effect on risky investment. These results highlight that term deposits contract rigidity and household wealth affects the monetary policy pass-through.

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

JEL Classification: D12, D14, D91, E21, E22, E52, G21, G50

Suggested Citation

Agarwal, Sumit and Chua, Yeow Hwee and Ghosh, Pulak and Song, Changcheng, Consumption and Portfolio Rebalancing Response of Households to Monetary Policy (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)

Nanyang Technological University (NTU) ( 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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