How do Retail Investors Adapt to Exchange Rate Shocks?
62 Pages Posted: 12 Dec 2024 Last revised: 13 Jan 2025
Date Written: December 10, 2024
Abstract
We study the impact of monetary policy on household finance in open economies. We examine the response of retail investors to a policy shock which led to (i) a sharp appreciation of the domestic currency, (ii) a significant increase in exchange rate volatility, and (iii) the introduction of a negative policy rate. Our analysis is based on monthly, account-level data covering bank deposits, securities holdings and trades for a large sample of affluent bank clients. The policy shock leads to a shift of assets away from fixed income securities towards domestic currency bank deposits and foreign currency risky securities. Wealthier clients display a stronger portfolio shift towards risky securities in foreign currency as they search for yield. Investor attention, as measured by trading activity and contacts with bank advisors, increases temporarily after the shock.
Keywords: Household finance, Monetary policy, Financial stability, Exchange rates, Interest rates
JEL Classification: E41, E52, E58, F31, G11, G21, G51
Suggested Citation: Suggested Citation