Martin Hodula, Simona Malovaná
Do domestic or foreign interest rates matter more for investor behavior in a small open economy? This paper examines how domestic investors adjust mutual fund allocations in response to monetary policy shocks, using granular Czech mutual fund data from 2009 to 2023. Employing a local projection framework with an instrumental variables strategy, we show that fund flows react strongly to exogenous changes in interest rate differentials. Foreign monetary policy shocks are found to have a more pronounced effect than domestic ones. These responses occur almost exclusively through adjustments in inflows, with outflows remaining largely stable, indicating that monetary policy influences new allocations rather than causing redemptions. Exchange rate movements, economic sentiment, and fund liquidity further modulate these effects, making them stronger when the currency depreciates, sentiment is negative, or funds are less liquid.
JEL codes: E44, E52, F32, G11
Keywords: Domestic investors, foreign monetary policy, interest rate differentials, liquidity, mutual fund flows, small open economy
Issued: August 2025
Download: CNB WP No. 11/2025 (pdf, 4.4 MB)