Money Market Fund Growth During Hiking Cycles: A Global Analysis

This paper examines the drivers of money market funds (MMFs) growth during monetary policy hiking cycles. Analyzing data from nine countries with notable MMF sectors post-pandemic, it examines three main drivers: yield differentials between MMFs and bank deposits, banking turmoils that affect perceptions of relative safety for traditional cash options, and structural characteristics (types) of MMFs. The findings indicate that MMFs attract capital during rising interest rates driven primarily by yield-seeking behavior. This pattern persisted following the 2023 banking turmoil, particularly in the U.S., where yield remained the dominant driver. After accounting for yield differentials, MMF growth was not unusually high compared to previous hiking cycles, suggesting limited evidence of widespread flight-to-safety flows. Moreover, when MMF yields rise, investors in the US and the euro area increasingly favor private debt MMFs, likely due to their higher yields. The study underscores the trade-off between safety and yield in investor behaviour, providing insights for policymakers on enhancing financial stability.