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

42 Pages Posted: 1 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: January 30, 2017

Abstract

This study empirically investigates the spillover effect of the US Fed’s monetary policy on the international capital flow in South Korea. Novel high frequency data from the EPFR Global and the event study strategy allow us to identify the Fed’s policy shock with minimal assumptions. In contrast to the conventional wisdom, our identification strategy finds that contemporary cross-border equity flows increase upon a (more-than-expected) contractionary interest rate policy during the event week. This result is robust to exclusion of influential observations, alternative estimation methods as well as inclusion of an additional explanatory variable which explicitly controls for possible endogeneity. When the business cycle asymmetry is taken into account, our simplistic model explains the variation in the active equity flow up to 72%. International bond investors also respond positively to the Fed policy surprise, in one week prior to the policy event. The effect of the US policy shock does not last longer than a week’s time after the initial impact for both equity and bond flows. Finally, we replicate the negative estimators found in the literature using full sample regressions. This result indirectly show that differences in results are potentially attributed to the difference in identification methodologies, not the data. Our findings suggest that the implicit identification assumptions in conventional empirical capital flow literature need further investigations.

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 (January 30, 2017). Bank of Korea 2016-21; Asian Finance Association (AsianFA) 2017 Conference. Available at SSRN: https://ssrn.com/abstract=2908272 or http://dx.doi.org/10.2139/ssrn.2908272

Jieun Lee

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 (Contact Author)

Newcastle University Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom

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