Stock Market Participation, Inequality, and Monetary Policy

57 Pages Posted: 7 Jul 2020

See all articles by Davide Melcangi

Davide Melcangi

Federal Reserve Banks - Federal Reserve Bank of New York

Vincent Sterk

University College London

Date Written: July 2020

Abstract

What role does stock investment play in the transmission of monetary policy to the real economy? We study this question using a New Keynesian model with heterogeneous households. Following a monetary tightening, stock market participants rebalance their investments away from stocks, in line with empirical evidence on mutual fund flows. This response depresses aggregate investment and hence aggregate output and income, which feeds back into an even larger decline in stock investment. The strength of this channel is, however, highly sensitive to household heterogeneity. Therefore, we design the model to account endogenously for the observed population share of stockholders, their income characteristics, and their saving behavior. We find that, quantitatively, the stock investment channel of monetary policy dominates the consumption channels often emphasized in the literature, and also that it has become more powerful since the 1980s, as stock market participation increased.

Keywords: monetary policy, stock investment, heterogeneity

JEL Classification: E21, E30, E50, E58

Suggested Citation

Melcangi, Davide and Sterk, Vincent, Stock Market Participation, Inequality, and Monetary Policy (July 2020). FRB of New York Staff Report No. 932, Available at SSRN: https://ssrn.com/abstract=3641745 or http://dx.doi.org/10.2139/ssrn.3641745

Davide Melcangi (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Vincent Sterk

University College London ( email )

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