Fed policy expectations and portfolio flows to emerging markets

Abstract

Abstract:The empirical literature has long established that U.S. interest rates are an important driver of international portfolio flows, with lower rates "pushing" capital to emerging markets. On the basis of this literature, it is often argued that the Federal Reserve's imminent policy tightening cycle is likely to weigh on portfolio flows to emerging markets in coming years. The analysis presented in this paper offers a different interpretation of the literature, suggesting that it is 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 foreign portfolio inflows and vice versa. Given current market expectations of sustained increases in the federal funds rate in coming years, EM portfolio flows could be boosted by a slower pace of Fed tightening than currently expected or could be reduced by a faster pace of Fed tightening. JEL Classification Numbers: E43, F32, F41, F42, G11

Global and Local Currency Effects on Euro Area Investment in Emerging Market Bonds

“…In contrast to previous studies of global spillovers to EMEs (e.g. Ahmed and Zlate 2014;Burger et al 2015;Tillman 2016;Fratzscher, Lo Duca, and Straub 2018;Koepke 2018), we fail to find a significant role for other global factors such as the VIX and Fed or ECB monetary policy in explaining changes in emerging market bonds holdings.…”

What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature

“…Not all studies distinguish between equity and debt flows when analysing portfolio flows movements, but to the extent that they do, most studies considered in this survey find that bond flows are more sensitive to mature economy interest rates than equity flows (including Taylor and Sarno, ; Koepke, ; Dahlhaus and Vasishtha, ). An exception is Chuhan et al .…”

“…There is very robust evidence that banking flows and both types of portfolio flows are strongly affected by global risk aversion, which has received particular attention since the global financial crisis of 2008–2009. Empirical studies almost universally find a strong and statistically significant impact of increases in global risk aversion on these capital flows components (including Milesi‐Ferretti and Tille, ; Fratzscher, ; Broner et al ., ; Rey, ; Ananchotikul and Zhang, ; Koepke, ; Bruno and Shin, ).…”

“…For portfolio flows, the evidence suggests that external factors (especially risk aversion) are the dominant drivers of short run movements, while pull factors (especially macroeconomic conditions) seem to be less important at high frequencies and matter more for long‐term trends. For example, Fratzscher () and Koepke () find only a limited role for domestic macroeconomic variables at the weekly and monthly frequencies, respectively, while Baek () and De Vita and Kyaw () find strong evidence for the role of domestic output growth at the quarterly frequency. These results are consistent with Ananchotikul and Zhang (), who use weekly fund flows data and find that the contributions from external factors are much more volatile, while those of pull factors are small at high frequencies but more persistent.…”

Currency Wars, Coordination, and Capital Controls

“…Second, it leaves out the third channel discussed earlier, 10 This is the standard academic definition, and the one used for example by Jeff Frankel in the paper he presented last year at this Forum, called "International coordination". .…”