Asset Allocation and Monetary Policy: Evidence from the Eurozone
Harald Hau () and
No 9581, CEPR Discussion Papers from C.E.P.R. Discussion Papers
The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by either real short-term interest rates or Taylor rule residuals varied substantially across countries in the period from 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. A ten-basis-point lower real short-term interest rate is associated with a 0.8% incremental money market outflow and a 1% incremental equity market inflow by local investors relative to asset under management. The latter produces the strongest equity price increase in countries where domestic institutional investors represent a large share of the countries' stock market capitalization.
Keywords: asset price inflation; monetary policy; risk seeking; Taylor rule residuals (search for similar items in EconPapers)
JEL-codes: G11 G14 G23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ifn and nep-mon
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Working Paper: Asset Allocation and Monetary Policy: Evidence from the Eurozone (2018)
Journal Article: Asset allocation and monetary policy: Evidence from the eurozone (2016)
Working Paper: Asset Allocation and Monetary Policy: Evidence from the Eurozone (2013)
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