Monetary Policy and Reaching for Income

Kent Daniel, Lorenzo Garlappi and Kairong Xiao

No 25344, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E50 G11 G4 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-mac and nep-upt
Note: AP ME
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Citations: View citations in EconPapers (4)

Published as KENT DANIEL & LORENZO GARLAPPI & KAIRONG XIAO, 2021. "Monetary Policy and Reaching for Income," The Journal of Finance, vol 76(3), pages 1145-1193.

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