WORK IN PROGRESS

Monetary Policy & Household Portfolio Choice

with Tiago Bernardino, Pedro Brinca, Ana Melissa Ferreira, Hans Holter and Luís Teles Morais

How does monetary policy affect household portfolio decisions? In this paper, we analyse how households adjust their financial portfolios – namely, in terms of exposure to risk – in response to well-identified shocks to the policy interest rate. Resorting to highly granular data on the balance sheets of Norwegian households from 1999 to 2015, we show there is no significant portfolio rebalancing reaction after a contractionary monetary policy shock. This challenges prevailing "reaching for yield" theories of portfolio choice. We also explore how these responses differ over the life-cycle, across population groups with different wealth, financial wealth and indebtedness levels.

Financial (Dis)integration and Monetary Policy

The risk that fragmented financial markets represent to a uniform transmission of monetary policy motivated a close monitoring of the state of financial integration in the Euro Area. I attempt to provide evidence of the relationship between financial integration and monetary transmission mechanism. I compute impulse responses to a monetary shock for different levels of financial integration using local projections on panel data comprising each member state and subsamples. The findings show a negative response of inflation and output to a tightening monetary policy under a high level of financial integration. In contrast, the impulse responses to the same shock are close to null under a low level of financial integration. These findings suggest that the fragmentation of the financial system affects the effectiveness of the European Central Bank's policy actions.