Household Portfolios and Monetary Policy

We show that expansionary monetary policy is positively (inversely) associated with household portfolio allocation to high-risk (low-risk) assets, in line with “reaching for yield” behaviour. Our main findings are based on analysis of US household level panel 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