Money Market Fund Growth During Hiking Cycles: A Global Analysis

IMF Working Papers, July 25, 2025

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Canonical URL: Money Market Fund Growth During Hiking Cycles: A Global Analysis

Author: Kleopatra Nikolaou
Date: July 25, 2025
Study sample: data from nine countries with notable MMF sectors post-pandemic
Main research question: What drives money market funds (MMFs) growth during monetary policy hiking cycles?
Three drivers examined:
- yield differentials between MMFs and bank deposits
- banking turmoils that affect perceptions of relative safety for traditional cash options
- structural characteristics (types) of MMFs

MMFs attract capital during rising interest rates primarily due to yield-seeking behavior.
This yield-driven 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.
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 highlights a trade-off between safety and yield in investor behaviour with implications for financial stability.

Comparative analysis across nine jurisdictions to isolate the impact of:
- yield differentials between MMFs and bank deposits
- banking-sector turmoil shocks to perceptions of safety of traditional cash options
- MMF structural types (e.g., private debt MMFs)
Temporal focus includes the post-pandemic period and the 2023 banking turmoil episode.

Policymakers should note that elevated MMF inflows during hiking cycles are largely yield-driven rather than primarily flight-to-safety driven.
Monitoring MMF yields relative to deposit rates can improve understanding of liquidity shifts between banks and MMFs during tightening cycles.
The increasing investor preference for private debt MMFs in the US and euro area when yields rise suggests attention to:
- the higher-yield/higher-risk channel within MMF sectors
- structural and prudential frameworks that influence investor migration across MMF types and bank deposits