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Fed policy expectations and portfolio flows to emerging markets

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  • Koepke, Robin

Abstract

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.

Suggested Citation

  • Koepke, Robin, 2018. "Fed policy expectations and portfolio flows to emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 55(C), pages 170-194.
    • Handle: RePEc:eee:intfin:v:55:y:2018:i:c:p:170-194
    DOI: 10.1016/j.intfin.2018.03.003
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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