Does monetary policy in advanced economies have differentiated effects on portfolio flows to emerging economies?

Marco Hernandez

doi:10.30585/jrems.v2i3.483

Abstract

This work analyzes whether the monetary policy in advanced economies (the US, the euro area, and the UK) had differentiated effects on portfolio flows from these countries toward EMEs. The results show the following: First, US monetary policy had a bigger impact on bond and equity investment to EMEs than the euro area or UK monetary policy. Second, investors' response to US monetary policy was mostly homogeneous. Among EMEs regions, foreign portfolio investment to Emerging Europe and Latin America was more volatile that than to Emerging Asia, probably because other factors such as investors' preference (in the case of bond flows) or expectations of firms' profits (in the case of equity flows) could play an important role in investors' decisions. These results could be useful for policymakers from EMEs as a benchmark to anticipate differentiated effects in portfolio flows caused by advanced economies' monetary policy.

Highlights

Foreign portfolio flows to emerging market economies (EMEs) increased dramatically after the global financial crisis
In the percentage of assets under management, Emerging Europe and Latin America saw bigger movements of capital relative to those seen in Emerging Asia
The implementation of QE3 did motivate US investors to increase their demand for EMEs' bonds, being E-Europe the region that saw flows rising more, as a percentage of assets under management (AUM), followed by Latin America (Latam) and Emerging Asia (E-Asia)

Summary

Introduction

Foreign portfolio flows to emerging market economies (EMEs) increased dramatically after the global financial crisis. Researchers have attributed such phenomena to a search for yield behavior by investors facing very low-interest rates and higher global liquidity due to the implementation of unconventional monetary policy measures (UMPs) in advanced economies. When contrasting portfolio versus other types of flows the authors found that the first has a strong co-movement, while it is not so high for other flows like foreign direct investment or banking flows (see Byrne and Fiess (2011), IMF (2011), IMF (2012), Fratzscher (2012), Lo Duca (2012), Bowman et al (2014) and Ahmed and Zlate (2014))

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Conclusion