Fed Policy Expectations and Portfolio Flows to Emerging Markets
Institute of International Finance
June 18, 2014
The Federal Reserve’s unconventional monetary stimulus measures have revived a controversial policy debate about the impact of U.S. monetary policy on capital flows to emerging markets. This paper presents evidence of an important transmission channel that has not explicitly been considered in the existing literature: a market expectations channel. When market participants adjust their expectations of future U.S. monetary policy, they respond by changing their portfolio allocations to emerging markets. Shifts in expectations towards easier monetary policy result in greater foreign portfolio inflows and vice versa. In recent years, shifts in market expectations towards tighter U.S. monetary policy appear to have had a disproportionately large adverse impact on portfolio flows. The described effects are particularly strong for portfolio bond flows.
Number of Pages in PDF File: 37
Keywords: Capital Flows, Emerging Markets, Monetary Policy, Market Expectations, Push and Pull
JEL Classification: E43, F32, F41, F42, G11
Date posted: June 20, 2014
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