Monetary Policy and the Run Risk of Loan Funds - FEDERAL RESERVE BANK of NEW YORK

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Monetary Policy, Investor Flows, and Loan Fund Fragility

Previous title: “Monetary Policy and the Run Risk of Loan Funds”

Number 1008
March 2022 Revised April 2025

JEL classification: G23, E52, G28

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

We show that monetary policy shocks have a positive effect on flows in bank-loan mutual funds. This relationship, however, is asymmetric: positive shocks cause small inflows, whereas negative shocks cause large outflows. Further, the effect of monetary policy shocks is stronger when short-term rates are higher. Finally, we document that large outflows from loan funds lead to significant declines in loan-level prices in the secondary 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.

Available only in PDF

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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