The effects of US monetary policy on international mutual fund investment

We study the effects of U.S. monetary policy on international mutual fund investment. We apply a novel variant of the shock identification procedure in Bu et al. (2021) to decompose observed U.S. monetary policy surprises into pure monetary policy shock and information news shock components. An increase in interest rates driven by a pure monetary policy shock leads to large and persistent outflows from emerging markets (EMs) and to a lesser extent global funds. On the other hand, increases in interest rates driven by positive information news shocks (i) do not cause outflows from EM funds, and (ii) lead investors to reallocate capital out of safe U.S. bond funds and into growth-sensitive U.S. and global equity funds. We attribute these differences to the risk-taking channel of monetary policy. Pure monetary policy shocks heighten risk aversion, while information news shocks lower uncertainty. (c) 2022 Elsevier Ltd. All rights reserved.