Monetary policy, fragility, and fund flows

Falko Fecht and Moritz Kellers

No 09/2026, Discussion Papers from Deutsche Bundesbank

Abstract: We study how monetary policy is transmitted through the open-end investment fund (OEIF) sector and how this transmission depends on fund fragility. Using high-frequency identified ECB monetary policy surprises and daily share-class data on German-domiciled OEIFs from 2010 to 2023, we show that an unexpected 10 basis point monetary tightening reduces cumulative fund net inflows by more than 0.2 percentage points within two weeks (about 0.7 standard deviations of monthly sector flows). This effect is highly uneven: fragile funds-identified by an excessive flow response to past under-performance-experience an additional outflow of about 0.2 percentage points compared to their peers, implying a total response roughly three times as large as for non-fragile funds. Intuitively, the pattern is present only for unexpected tightening, not easing. Fragile bond funds reduce corporate bond holdings more strongly, and fragile funds meet redemptions by running down bank deposits. While the average fund increases deposits after tightening, fragile funds reduce deposits and shrink liquidity buffers amplifying the deposit channel. At the bank level, investor reallocations into overnight deposits induce a reallocation of deposits across banks. Overall, fund fragility emerges as a key state variable for monetary policy transmission and financial stability.

Keywords: monetary policy; investment funds; financial fragility (search for similar items in EconPapers)
JEL-codes: E52 G1 G23 (search for similar items in EconPapers)
Date: 2026
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:339998

DOI: 10.71734/DP-2026-9

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