NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Lorenzo Garlappi

Sauder School of Business
University of British Columbia
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Vancouver, BC V6T 1Z2
Canada
Tel: 604-822-8848

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Institutional Affiliation: University of British Columbia

NBER Working Papers and Publications

December 2018Monetary Policy and Reaching for Income
with Kent Daniel, Kairong Xiao: w25344
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'' b...
 
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