WEALTH, ASSET PORTFOLIO, MONEY DEMAND AND POLICY RULE

Authors

  • Ricardo M. Sousa

    Corresponding author
    1. University of Minho, NIPE, London School of Economics and FMG
    • Correspondence: Ricardo M. Sousa, University of Minho, Economic Policies Research Unit (NIPE) and Department of Economics, Campus of Gualtar, 4710-057 Braga, Portugal. Tel.: +351 253 601935; Fax: +351 253 676375. Email: rjsousa@eeg.uminho.pt.

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  • The author would like to thank the Guest Editor, Fredj Jawadi, and participants at the 25th Annual Congress of the European Economic Association and the First International Symposium in Computational Economics and Finance for very helpful comments and suggestions.

ABSTRACT

I look at the linkages between monetary policy and asset wealth using quarterly data for the USA. I show that a positive interest rate shock leads to a fall in aggregate wealth and an important change in portfolio composition: housing wealth gradually decreases, but the effects are very persistent; and financial wealth quickly shrinks, but the impact is short-lived. I also find that the money market can be characterized as follows: (i) the money demand has a large interest elasticity and a small output elasticity; and (ii) the estimated monetary policy reaction function highlights the special focus given by the central bank to developments in monetary aggregates. These features call for an approach whereby monetary authorities put more emphasis on tracking wealth developments, in particular, given the asset portfolio rebalancing between money holdings and financial and/or housing assets.

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