European Central Bank working paper finds combined monetary and macroprudential tightening can either shrink or expand euro area investment fund assets depending on domicile

The European Central Bank published Working Paper Series No 3151 (the authors’ views) assessing how monetary policy surprises interact with macroprudential tightening in shaping euro-area investment fund activity. Using a state-dependent local projection approach, it finds that identical joint tightening episodes can produce opposite responses across countries, with contractions in bank-centric markets but inflows in major fund hubs. Using monthly data from January 2009 to December 2021 for Germany, France, the Netherlands, Luxembourg, Ireland and Italy, the paper measures monetary shocks via high-frequency movements in the German 10-year Bund yield around European Central Bank Governing Council announcements and identifies macroprudential tightening episodes from the IMF’s iMaPP database. In Germany, France and the Netherlands, a joint shock reduces fund assets by around 0.1–0.2% on impact and deepens to a 0.4–0.6% contraction at peak, while Luxembourg, Ireland and Italy show a sustained inflow of roughly 0.5–1%. Liquidity-focused tightening is associated with faster, more pronounced reactions than capital-based measures, which are more gradual but longer-lasting, and equity funds are generally more sensitive than bond funds, with bond funds in hubs partly offsetting contractionary forces through higher yields. A simple balance-sheet framework attributes the divergence to interacting funding-cost and collateral-constraint channels, and an additional exercise suggests the “hub inflow” pattern weakens when macroprudential tightening is more synchronised across several countries, consistent with reduced scope for cross-border rerouting.