Monetary Policy, Investor Flows, and Loan Fund Fragility

Nicola Cetorelli, Gabriele La Spada and Joao Santos

No 1008, Staff Reports from Federal Reserve Bank of New York

Abstract: We show that monetary policy shocks have a positive effect on flows in bank-loan mutual funds. This relationship, however, is asymmetric: positive shocks cause small inflows, whereas negative shocks cause large outflows. Further, the effect of monetary policy shocks is stronger when short-term rates are higher. Finally, we document that large outflows from loan funds lead to significant declines in loan-level prices in the secondary leveraged loan market. Our results identify a novel channel of monetary policy transmission that not only affects a critical segment of the credit sector, but also has the potential to impact financial stability.

Keywords: mutual funds; monetary policy; leverage lending (search for similar items in EconPapers)
JEL-codes: E52 G23 G28 (search for similar items in EconPapers)
Pages: 76
Date: 2022-03-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Note: Revised April 2025. Previous title: “Monetary Policy and the Run Risk of Loan Funds"
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Citations: View citations in EconPapers (1)

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