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Monetary Policy and Reaching for Income
Author(s) -
DANIEL KENT,
GARLAPPI LORENZO,
XIAO KAIRONG
Publication year - 2021
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.13004
Subject(s) - economics , portfolio , fixed income , rule of thumb , dividend , monetary economics , yield (engineering) , bond , preference , comprehensive income , portfolio allocation , financial economics , microeconomics , gross income , public economics , finance , materials science , algorithm , state income tax , tax reform , computer science , metallurgy
Using data on individual portfolio holdings and on mutual fund flows, we find that low interest rates lead to significantly higher demand for income‐generating assets such as high‐dividend stocks and high‐yield bonds. We argue that this “reaching‐for‐income” phenomenon is driven by investors who follow the “living off income” rule‐of‐thumb. Our empirical analysis shows that this preference for current income affects both household portfolio choices and the prices of income‐generating assets. In addition, we explore the implications of reaching for income for capital allocation and the effectiveness of monetary policy.