Pushing or Pulling?

Nathan Converse (Federal Reserve Board)

Abstract:

This paper analyzes the relationship between international capital flows and the unconventional monetary policies implemented by the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan since the start of the Global Financial Crisis. We measure monetary policy shocks using intraday changes in bond futures yields, as in Curcuru et al (2018). This technique allows us to examine the asymmetric effects of both policy easings (tightenings) as well as announcements that are less accommodative (hawkish) than expected, and provide insights into the ongoing policy normalization by the central banks we study. We identify cross-border investors’ reaction to these shocks using daily data on flows to mutual funds and ETFs obtained from Emerging Portfolio Fund Research (EPFR). In addition, we shed further light on the behavior of fund investors’ by examining active portfolio reallocation as discussed in Tille and van Wincoop (2010) and Ahmed et al (2015). We find that monetary policy easings are generally associated with inflows into developed market funds, particularly equity funds. Unlike several other studies, we do not find that quantitative easing by the Federal Reserve has caused a reallocation toward emerging market assets. During the normalization period, Fed’s tightening announcements continue to be associated with inflows into U.S equity funds and outflows from all other funds. Our results highlight the shortcomings of using dummy variables in an event study framework and also of using bilateral capital flows to study portfolio reallocation.