On the International Spillovers of US Quantitative Easing

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. While most of the debate has focused on the effects of QE on the US economy, foreign policy-makers -in particular in emerging markets-argued that QE policies have created excessive global liquidity and caused an acceleration of capital flows to EMEs. In turn, this capital flow surge is widely blamed for appreciation pressures on EME currencies and a build-up of financial imbalances in EMEs. Terms of use: Documents in EconStor mayTo shed some light on this issue, the paper analyses the effects of the Federal Reserve's unconventional policies on the US and on 65 foreign financial markets. Importantly, the paper extends the existing literature by investigating the effects on both global asset prices and capital flows. For this purpose, we use a relatively novel database of daily portfolio flows into bond and equity mutual funds, taking primarily a US investor perspective. In this way, we can track capital injections into funds (portfolio flows) across countries.We analyze different types of US unconventional monetary policy measures (liquidity operations, purchases of MBS and of US Treasuries) in order to understand whether and why QE1 and QE2 have exerted different effects on US and foreign markets. In contrast with most of the literature on US QE, which has focused narrowly on announcement effects, we make a distinction between announcements of Fed interventions and the actual market operations.The results in the paper illustrate how US monetary policy since 2007 has contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets. First, we find that Fed measures in the early phase of the crisis (QE1) were highly effective in boosting bond and equity prices, especially in the US, and led to US dollar appreciation. Conversely, QE2 boosted equity prices worldwide and led to US dollar depreciation. Yet Fed policies functioned in a pro-cyclical manner for capital flows to EMEs and in a counter-cyclical way for the US. QE1 triggered a portfolio rebalancing across countries out of emerging markets (EMEs) into the US, while QE2 triggered rebalancing in the opposite direction. This finding may be interpreted as lending support to the concerns expressed by policymakers in EMEs. The results suggest that there are indeed global spillovers and externalities from monetary policy decisions in advanced economies. However, the paper is mute on whether such externalities are overall positive or negative for other economies. The potentially...

Determinants of global spillovers from US monetary policy

“…Second, this paper is also related to the literature on the spillovers from US monetary policy to global financial markets (see Craine and Martin, 2008;Ehrmann and Fratzscher, 2009;Wongswan, 2009;Neely, 2010;Hausman and Wongswan, 2011;Gurkaynak and Wright, 2011;Fratzscher et al, 2013;Moore et al, 2013;Rogers et al, 2014). These papers study the effects of US monetary policy shocks on other countries' equity and bond markets, capital flows and exchange rates, typically at high frequency.…”

US Monetary Policy and International Bond Markets

“…In a followup paper, Bauer and Neely (2014) use dynamic term structure models to parse out the extent to which the declines in foreign interest rates occurred through the signaling or portfolio rebalancing channels and find evidence that both channels were in operation. Our paper is also related to the recent work of Fratzscher et al (2013) and Bowman et al (2015); the former paper systematically analyzes the global spillovers of the Federal Reserve's asset purchase programs on a broad array of financial asset prices, while the latter study empirically quantifies the spillover effects of US unconventional policies on emerging market economies. The key takeaway of these two papers is that US unconventional monetary policy measures induced a significant portfolio reallocation among investors and led to a notable repricing of risk in global financial markets.…”

Quantitative Easing and Asset Bubbles in a Stock-Flow Consistent Framework

“…Empirical studies have shown that quantitative easing has accelerated the flow of capital into less economically developed countries beyond reasonable bounds (Fratzscher, Lo Duca, and Straub 2013). From within the Keynesian paradigm, quantitative easing was criticized on the grounds that with long-term bonds removed from their portfolios, investors would spend too much in other areas, which could lead to the overvaluation of certain assets and the associated bubble behavior (Palley 2011).…”