US Interest Rate Policy Spillover and International Capital Flow: Evidence from Korea

46 Pages Posted: 20 Jan 2017 Last revised: 4 Feb 2017

See all articles by Jieun Lee

Jieun Lee

The Bank of Korea; Bank of Korea - Economic Research Institute

Jung-Min Kim

University of Seoul, College of Business Administration

Jong Kook Shin

Newcastle University Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 30, 2016

Abstract

Using the novel high frequency capital flow dataset from the EPFR Global, this study empirically investigates the spillover effects of the US Fed’s monetary policy on the international capital flow in South Korea. Around the Fed’s monetary policy announcement (event) week, we find that equity investors appear to temporarily increase (decrease) their portfolio holdings in South Korea upon a more-than-expected contractionary (expansionary) interest rate policy, while bond investors do not change their portfolio holdings much. This result is robust to the exclusion of influential observations, alternative estimation methods as well as inclusion of an additional explanatory variable which explicitly controls for possible endogeneity. Additionally, we conduct the full sample regression analysis including event and non-event weeks after controlling for the pull and push factors that are likely to be associated with the international capital flow. Our empirical evidence shows that unexpected US policy shocks have a significant negative impact on certain types of international capital flow. Specifically, the unexpected US contractionary monetary policy appears to be associated with equity fund outflow from the US, passive and institutional investors and bond fund outflow from retail investors.

Keywords: US monetary policy, Interest rate policy, Spillover, Capital flow, High frequency identification, Event study

JEL Classification: E44, E52, E58, F32

Suggested Citation

Lee, Jieun and Kim, Jung-Min and Shin, Jong Kook, US Interest Rate Policy Spillover and International Capital Flow: Evidence from Korea (December 30, 2016). Bank of Korea WP 2016-21. Available at SSRN: https://ssrn.com/abstract=2901794 or http://dx.doi.org/10.2139/ssrn.2901794

Jieun Lee (Contact Author)

The Bank of Korea ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794, 100-794
Korea Republic of (South Korea)
82-2-759-5470 (Phone)

Bank of Korea - Economic Research Institute ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794
Korea Republic of (South Korea)

Jung-Min Kim

University of Seoul, College of Business Administration ( email )

Seoul 02504
Korea, Republic of (South Korea)
+82-2-6490-2259 (Phone)

Jong Kook Shin

Newcastle University Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom

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