Quantifying the Impact of Conventional and Unconventional Monetary Policy on the Performance of Euro-denominated Money Market Funds

Eirik Waldenström Longva & William Lawrence

Student thesis: Master thesis


The purpose of this study is to assess the impact of both conventional and unconventional monetary policy on the performance of euro-denominated money market funds. First, we use panel data techniques to assess the impact of a change in policy rate, using overnight indexed swap rates as a proxy, on money market funds returns. Our findings here encourage us to extend our analysis to quantify the impact of unconventional monetary policy. To do this, we employ a method created by Altavilla, Brugnolini, Gürkaynak, Motto, & Ragusa (2019), which decomposes unconventional monetary policy into three factor shocks: timing, the change in the timetable of policy announcements; forward guidance, ECB communication over the path of future rates; and quantitative easing, the impact of asset purchase programmes. We find that money market fund returns are more sensitive to changes in policy rate in post-2014 negative rate period than in pre-2008 crisis period. In the post-2014 period, the literature and our results suggest increased linkage between MMFs and banks, shortening money market funds’ investment term-structure. Money market fund returns are more sensitive to deposit rates changes than bond rate changes in the post-2014 period than in pre-crisis period, suggesting that money market funds are pivoting away from bonds and into bank deposit facilities. Our results find that the impact of forward guidance shocks on money market fund returns becomes insignificant in the post-2014 sample, having been significant in the pre-crisis period. We believe this is due to forward guidance announcements containing little information that markets have not already priced-in to asset prices, as markets are aware that rates over the short-to-medium-term are expected to remain on the current low-and-negative path. We also find that a quantitative easing policy which is larger in size than markets are expecting has a negative impact on money market fund returns.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2021
Number of pages73