Household Portfolios and Monetary Policy

We show that expansionary monetary policy is associated with higher household portfolio allocation to high risk assets and lower allocation to 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 also 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. Furthermore, our results highlight the role of self-reported risk attitudes in affecting the response of household portfolios to monetary policy changes. 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