Working Paper: NBER ID: w31143
Authors: Anusha Chari
Abstract: Over the last two decades, the unprecedented increase in non-bank financial intermediation, particularly open-end mutual funds and ETFs, accounts for nearly half of the external financing flows to emerging markets exceeding cross-border lending by global banks. Evidence suggests that investment fund flows enhance risk-sharing across borders and provide emerging markets access to more diverse forms of financing. However, a growing body of evidence also indicates that investment funds are inherently more vulnerable to liquidity and redemption risks during periods of global financial market stress, increasing the volatility of capital flows to emerging markets. Benchmark-driven investments, namely passive funds, appear particularly sensitive to global risk shocks such as tightening US dollar funding conditions relative to their active fund counterparts. The procyclicality of investment fund flows to emerging markets during times of global stress poses financial stability concerns with implications for the role of macroprudential policy.
Keywords: No keywords provided
JEL Codes: F21; F32; F36; F65; G11; G15; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Global risk shocks (F65) | Nonbank financial intermediation (NBFI) flows to emerging markets (F65) |
| US monetary policy shocks (E39) | Global risk shocks (F65) |
| Expansionary monetary policy in the US (E52) | Increased risk-taking behavior among global investors (F65) |
| Increased risk-taking behavior among global investors (F65) | Higher capital inflows to emerging markets (F32) |
| Contractionary monetary policy in the US (E52) | Capital outflows from emerging markets (F32) |
| Global liquidity conditions (F65) | Procyclicality of investment fund flows (F32) |
| Procyclicality of investment fund flows (F32) | Volatility in capital flows to emerging markets (F32) |
| Vulnerabilities of NBFI to redemption risks (G33) | Volatility of capital flows (F32) |
| Volatility of capital flows (F32) | Financial returns in emerging markets (G15) |