Fed Policy Expectations and Portfolio Flows to Emerging Markets

Robin Koepke

MPRA Paper from University Library of Munich, Germany

Abstract: The empirical literature has long established that U.S. interest rates are an important driver of international portfolio flows, with lower rates “pushing” capital to emerging markets. On the basis of this literature, it is often argued that the Federal Reserve’s imminent policy tightening cycle is likely to weigh on portfolio flows to emerging markets in coming years. The analysis presented in this paper offers a different interpretation of the literature, suggesting that it is the surprise element of monetary policy that affects EM portfolio inflows. A shift in market expectations towards easier future U.S. monetary policy leads to greater foreign portfolio inflows and vice versa. Given current market expectations of sustained increases in the federal funds rate in coming years, EM portfolio flows could be boosted by a slower pace of Fed tightening than currently expected or could be reduced by a faster pace of Fed tightening.

Keywords: Capital Flows; Portfolio Flows; Emerging Markets; Monetary Policy; Market Expectations; Fed Funds Futures; Push and Pull (search for similar items in EconPapers)
JEL-codes: E43 F32 F4 G11 (search for similar items in EconPapers)
Date: 2014-05-25, Revised 2015-04-07
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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https://mpra.ub.uni-muenchen.de/63895/8/MPRA_paper_63895.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/65877/1/MPRA_paper_65877.pdf revised version (application/pdf)

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