International Spillovers of Large-Scale Asset Purchases

Abstract

This paper evaluates the international spillover effects of large-scale asset purchases (LSAPs) using an estimated two-country dynamic stochastic general-equilibrium model with nominal and real rigidities and portfolio balance effects. Portfolio balance effects arise from imperfect substitutability between short- and long-term bond portfolios in each country, as well as between domestic and foreign bonds within these portfolios. We show that LSAPs in the United States lower long-term yields and stimulate economic activity not only in the United States, but also in the rest of the world (ROW) economy. This occurs despite the currency appreciation in the ROW and the resulting deterioration in their trade balance. The key for this result is the decline in the ROW term premia through the portfolio balance channel, as the relative demand for ROW long-term bonds increases following an LSAP in the United States. Our model indicates that US asset purchases that generate the same output effect as US conventional monetary policy has larger international spillovers due to stronger portfolio balance effects. We also show that international openness in financial markets reduces the stimulatory effects of LSAPs in the originating country, while increasing their international spillover effects.

Domestic and multilateral effects of capital controls in emerging markets

“…The observation that capital-control policy matters mostly for gross flows and not for their net movement, but nevertheless affects exchange rates and monetary policy autonomy reflects the possibility that prices can adjust without a change in underlying flows (Rey, 2017;Froot and Ramodarai, 2005). Price changes may take place, for example, due to shifts in expectations, changes in order flows (Gyntelberg et al, 2018;Fan and Lyons, 2003) or alterations in the composition of flows due to portfolio rebalancing (Alpanda and Kabaca, 2015).…”

“…In fact, Alpanda and Kabaca (2015) also show that the portfolio rebalancing can lead to spillovers in the form of shifts in gross flows and risky longer term rates, without necessarily having an impact on net flows.…”

Do Term Premiums Matter? Transmission Via Exchange Rate Dynamics

“…In the literature subsequent to Chen, Cúrdia and Ferrero (2012), Wesolowski (2016) investigates the e¤ects of term premiums in the context of a small open economy model similar to our own and estimates the model using data for Poland. Alpanda and Kabaca (2015) examine the e¤ect of term premiums in a two-country DSGE model and show that U.S. unconventional monetary policy had strong international spillover e¤ects. Another strand of literature related to our paper is that on the relationship between interest rate di¤erentials and exchange rates, of which Engel (2014) provides a recent survey.…”

Unconventional Policies and Exchange Rate Dynamics

“…Households supply differentiated labor services indexed by i, but have full risk-sharing within each type of household. The supply of labor services for unrestricted household is 1]. The life-time utility function for a household j is given by:…”

“…For instance, quantified the macroeconomic effects of QE in the US in an estimated DSGE model. Similarly, Alpanda and Kabaca (2015) estimated the international spillovers from QE in the US. Furthermore, Gabaix and Maggiori (2015) studied the spillover effects from FX intervention in a two-country model.…”