Staff Reports
Monetary Policy, Investor Flows, and Loan Fund Fragility
“Monetary Policy and the Run Risk of Loan Funds”
Number 1008
March 2022 October 2023

JEL classification: G23, E52, G28

Authors: Nicola Cetorelli, Gabriele La Spada, and João A.C. Santos

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.

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Author Disclosure Statement(s)
Nicola Cetorelli
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Gabriele La Spada
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

João A. C. Santos
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
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