Monetary Policy, Investor Flows, and Loan Fund Fragility

RePEc Short ID: psa250
ORCID iD: 0000-0002-6002-5969

Cetorelli, Nicola; La Spada, Gabriele; Santos, João A. C.

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Monetary Policy, Investor Flows, and Loan Fund Fragility

Abstract: We find robust evidence indicating a pro-cyclical relationship between monetary policy shocks and loan fund flows. This relationship, however, is asymmetric: weaker for policy rate increases and stronger for policy rate decreases. Further, the effect of monetary policy shocks is stronger when short-term rates are higher. Finally, we document that large outflows from loan funds are associated with a decline in prices in the 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;

JEL Classification: E52; G23; G28;