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

Jieun Lee (), Jung-Min Kim () and Jong Shin
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Jieun Lee: Economic Research Institute, The Bank of Korea
Jung-Min Kim: University of Seoul

No 2016-21, Working Papers from Economic Research Institute, Bank of Korea

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 (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 F32 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2016-12-30
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2016-21.pdf Working Paper, 2016 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:bok:wpaper:1621

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