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Fed policy expectations and portfolio flows to emerging markets

Robin Koepke

Journal of International Financial Markets, Institutions and Money, 2018, vol. 55, issue C, 170-194

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.

Keywords: Capital flows; Emerging economies; U.S. monetary policy; Market expectations; Push and pull; Taper tantrum (search for similar items in EconPapers)
JEL-codes: E43 F32 F41 F42 G11 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:intfin:v:55:y:2018:i:c:p:170-194