Fed policy expectations and portfolio flows to emerging markets

The empirical literature has long established that U.S. interest rates are an important driver of international portfolio flows, with lower rates “pushing” foreign capital to EMs. On this basis, it is often argued that Fed tightening is likely to weigh on EM portfolio flows in coming years. This pap...

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Bibliographic Details
Published in:Journal of international financial markets, institutions & money institutions & money, 2018-07, Vol.55, p.170-194
Main Author: Koepke, Robin
Format: Article
Language:English
Subjects:
Capital flows
Emerging economies
Market expectations
Push and pull
Taper tantrum
U.S. monetary policy
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Summary:The empirical literature has long established that U.S. interest rates are an important driver of international portfolio flows, with lower rates “pushing” foreign capital to EMs. On this basis, it is often argued that Fed tightening is likely to weigh on EM portfolio flows in coming years. This paper offers a different interpretation of the literature and provides empirical evidence that it is mainly the surprise element of monetary policy that affects EM portfolio inflows. A shift in market expectations towards easier future U.S. monetary policy leads to greater EM portfolio inflows, while an upward shift in interest rate expectations reduces such flows.
ISSN:1042-4431
1873-0612
DOI:10.1016/j.intfin.2018.03.003