Monetary Policy Amplification through Bond Fund Flows
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I show that the secular rise of bond mutual funds and ETFs (``bond funds'') amplifies the bond market transmission of monetary policy. During monetary easing (tightening) cycles, bond funds experience large inflows (outflows) of return-chasing capital and increase (decrease) their corporate bond holdings significantly more than other corporate bond investors such as insurance companies and pension funds. In the cross section of firms, higher bond fund exposure leads to higher firm sensitivity to monetary policy -- during monetary easing, more-exposed firms experience larger bond returns, issue more debt, and increase more on payout or real investment. To quantify the aggregate effect, I estimate a nested logit demand system with flexible investor elasticity both within and across asset classes. Under a partial equilibrium decomposition, bond fund flows account for a large and increasing share of the aggregate bond yield sensitivity to monetary policy.