When Foreign Rates Matter More: Domestic Investor Responses in a Small Open Economy

Martin Hodula and Simona Malovana

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: Do domestic or foreign interest rates matter more for investor behavior in a small open economy? This paper examines how domestic investors adjust mutual fund allocations in response to monetary policy shocks, using granular Czech mutual fund data from 2009 to 2023. Employing a local projection framework with an instrumental variables strategy, we show that fund flows react strongly to exogenous changes in interest rate differentials. Foreign monetary policy shocks are found to have a more pronounced effect than domestic ones. These responses occur almost exclusively through adjustments in inflows, with outflows remaining largely stable, indicating that monetary policy influences new allocations rather than causing redemptions. Exchange rate movements, economic sentiment, and fund liquidity further modulate these effects, making them stronger when the currency depreciates, sentiment is negative, or funds are less liquid.

Keywords: Domestic investors; foreign monetary policy; interest rate differentials; liquidity; mutual fund flows; small open economy (search for similar items in EconPapers)
JEL-codes: E44 E52 F32 G11 (search for similar items in EconPapers)
Date: 2025-08
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.cnb.cz/export/sites/cnb/en/economic-re ... wp/cnbwp_2025_11.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2025/11

Access Statistics for this paper

More papers in Working Papers from Czech National Bank, Research and Statistics Department Contact information at EDIRC.
Bibliographic data for series maintained by Tomas Karhanek ().