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.
WEALTH, ASSET PORTFOLIO, MONEY DEMAND AND POLICY RULE
Article first published online: 5 MAR 2012
© 2012 Board of Trustees of the Bulletin of Economic Research and John Wiley & Sons Ltd
Bulletin of Economic Research
Volume 66, Issue 1, pages 95–111, January 2014
How to Cite
Sousa, R. M. (2014), WEALTH, ASSET PORTFOLIO, MONEY DEMAND AND POLICY RULE. Bulletin of Economic Research, 66: 95–111. doi: 10.1111/j.1467-8586.2011.00431.x
- Issue published online: 2 DEC 2013
- Article first published online: 5 MAR 2012
- asset portfolio;
- money demand;
- policy rule;
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.