Wealth, asset portofolio, money demand and policy rule

Abstract

I look at the linkages between monetary policy and asset wealth using quarterly data for the US. 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 e¤ects are very persistent; and nancial wealth quickly shrinks, but the impact is short-lived. I also nd 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 nancial and/or housing assets.