Ugo Bolletta: ugo.bolletta2[at]unibo.it
Mathieu Faure: mathieu.faure[at]univ-amu.fr
The degree of asset market participation has important implications for the relationship between the real interest rate and the aggregate demand (the IS curve). Our objective is to provide a quantitative estimate of the proportion of asset holders in the US and Euro Area starting from 1960s and 2000s respectively. In particular, we unveil the sub-periods where this number has fallen so dramatically that the IS curve becomes more vertical, and eventually inverted. We endogenize the identification of these periods through an estimation of a Markov-switching model displaying two (low and high) participation regimes. To account for the zero low bound on the policy rates, our model also features a shift in time preference shock which allows to distinguish between two steady states of the real interest rate, one of which being negative. We show that in the US the number of optimizing agents varied only during the Great Inflation and on the edge of the recent crisis. The proportion of non-participants has increased sufficiently to invert the IS curve. In the EA the asset market participation decreases significantly during a substantial period of the Great Recession, but just enough to provoke an increase in the slope of the IS curve without reverting it. Our result have important implications for the recent discussion on the effects of the unconventional monetary policy.