Ciminelli, G. (2018). Policy Guidance and the International Transmission of Macro News: Evidence from Investment Funds.

Gabriele Ciminelli | ASB Faculty | Research Paper


Discipline: Economics & Finance


This paper contends that U.S. macroeconomic releases are an important `global’ factor driving cross-border flows and that their effect depends on the guidance provided by the U.S. Federal Reserve (Fed). I source data on allocations into investment funds and study the response of U.S. investors to domestic employment news, focusing on the post-crisis period. I show that, when the Fed complemented its zero-rate policy with calendar-based forward guidance, monetary policy expectations became insensitive to macro releases and investors responded to positive employment news by re-balancing their portfolios toward faster growing and riskier countries. On the other hand, as the Fed progressively changed guidance to signal that it was ready to withdraw policy accommodation, investors perceived the same positive news to bring forward the moment of policy normalization and reacted by reducing their foreign market exposures. Countries with better institutions experienced less outflows, while those with a more open capital account fared worse. These findings highlight an important role of central bank guidance in determining how investors shift capital across countries in response to shocks. They also provide novel evidence of investors risk-taking abroad, following positive shocks at home, during periods of accommodative monetary policy.