Asset allocation and monetary policy: Evidence from the eurozone

Harald Hau and Sandy Lai

Journal of Financial Economics, 2016, vol. 120, issue 2, 309-329

Abstract: The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by real short-term interest rates varied substantially across countries in the period 2003–2010. We use this cross-country variation in the (local) tightness of monetary policy to examine its influence on equity and money market flows. In line with a powerful risk-shifting channel, we find that fund investors in countries with decreased real interest rates shift their portfolio investment out of the money market and into the riskier equity market, causing significant equity price inflation in countries where investment home bias is the strongest.

Keywords: Monetary policy; Asset price inflation; Risk-shifting; Taylor rule residuals (search for similar items in EconPapers)
JEL-codes: G11 G14 G23 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

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Related works:
Working Paper: Asset Allocation and Monetary Policy: Evidence from the Eurozone (2018)
Working Paper: Asset Allocation and Monetary Policy: Evidence from the Eurozone (2014)
Working Paper: Asset Allocation and Monetary Policy: Evidence from the Eurozone (2013)
Working Paper: Asset Allocation and Monetary Policy: Evidence from the Eurozone (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:120:y:2016:i:2:p:309-329

DOI: 10.1016/j.jfineco.2016.01.014

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