Monetary Policy and Reaching for Income

Using data on individual portfolio holdings and mutual fund flows, we find that low interest rates lead to significantly higher demand for income-generating assets such as high-dividend stocks high-yield bonds. We argue this “reaching-for-income” phenomenon is driven by investors who follow the “living off income” rule-of-thumb. Our empirical analysis shows preference current income affects both household choices prices of assets. In addition, explore implications reaching capital allocation effectiveness monetary policy.