Staff Reports
Stock Market Participation, Inequality, and Monetary Policy
Number 932
July 2020

JEL classification: E21, E30, E50, E58

Authors: Davide Melcangi and Vincent Sterk

What role does stock investment play in the transmission of monetary policy to the real economy? We study this question using a New Keynesian model with heterogeneous households. Following a monetary tightening, stock market participants rebalance their investments away from stocks, in line with empirical evidence on mutual fund flows. This response depresses aggregate investment and hence aggregate output and income, which feeds back into an even larger decline in stock investment. The strength of this channel is, however, highly sensitive to household heterogeneity. Therefore, we design the model to account endogenously for the observed population share of stockholders, their income characteristics, and their saving behavior. We find that, quantitatively, the stock investment channel of monetary policy dominates the consumption channels often emphasized in the literature, and also that it has become more powerful since the 1980s, as stock market participation increased.

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AUTHOR DISCLOSURE STATEMENT(S)
Davide Melcangi
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Vincent Sterk
This paper uses proprietary data from the Investment Company Institute (ICI). The Federal Reserve Bank of New York maintains an agreement with Refinitiv which gives data access to the ICI data through its Eikon product.
Use of the data to derive work products, such as publications, charts, and graphs, is permitted by the Agreement. The author will provide interested investigators the necessary information on how to obtain the data.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.