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Asset Allocation and Monetary Policy: Evidence from the Eurozone

Harald Hau () and Sandy Lai
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Sandy Lai: The University of Hong Kong

No 222013, Working Papers from Hong Kong Institute for Monetary Research

Abstract: 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 between 2003-2010. We use this cross-country variation in the (local) tightness of monetary policy conditions 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 lower real interest rates shift their portfolio investment out of the money market and into the riskier equity market. This produces the strongest equity price increase in countries where domestic institutional investors hold a large share of the countries' stock market capitalization.

Keywords: Monetary Policy; Asset Price Inflation; Risk Seeking; Taylor Rule Residuals (search for similar items in EconPapers)
JEL-codes: G11 G14 G23 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2013-11
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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Related works:
Working Paper: Asset Allocation and Monetary Policy: Evidence from the Eurozone (2018) Downloads
Journal Article: Asset allocation and monetary policy: Evidence from the eurozone (2016) Downloads
Working Paper: Asset Allocation and Monetary Policy: Evidence from the Eurozone (2013) Downloads
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