Household Portfolios and Monetary Policy

Abstract

We show that expansionary monetary policy is positively (negatively) associated with household portfolio allocation to high-risk (low-risk) assets, in line with ‘reaching for yield’ behaviour. Our main findings are based on an analysis of US household-level data using alternative measures of monetary policy shifts over the period 1999–2007. Using the two-part Fractional Response Model, we show that changes in the Federal Funds Rate (FFR) have a stronger impact on the decision to hold high-risk assets relative to the impact on the decision to hold low-risk assets. In addition, our findings indicate that the impact of FFR changes is stronger for active investors. Finally, our findings are robust over an extended time period (1999–2019) that includes the global financial crisis using a monetary policy measure that accounts for the post-crisis ZLB period.