Title: Monetary policy and reaching for income
Authors: Lorenzo Garlappi - University of British Columbia (Canada) [presenting]
Kent Daniel - Columbia University (United States)
Kairong Xiao - Columbia University (United States)
Abstract: The impact of monetary policy on investors' portfolio choice and asset prices is studied. Using data on mutual fund flows and individual trading records, we find that low-interest-rate monetary policy increases investors' demand for high-dividend stocks and drives up their asset prices. The increase in demand is more pronounced among investors who live off dividend income for consumption. To explain these empirical findings, we develop a portfolio choice model in which investors have quasi-hyperbolic time preferences and use dividend income as a commitment device to curb their tendency to over-consume in the short-run. 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 towards high-dividend stocks. Our finding suggests that low-interest-rate monetary policy may lead to under-diversification of investors' portfolios and may cause redistributive effects across firms that differ in their dividend policy.